Health Care and Insurance and Economy and Environment

BEHIND THE NEWS: Here's a Blues performance that won't get you down

September 5, 2005

Anthem Inc.'s $1.9 billion initial public offering in late 2001 set all kinds of records. It was the biggest IPO for a U.S. health care company ever, and the biggest IPO for a Hoosier company of any kind.

But that company, now known as WellPoint Inc., was puny compared with its size today. Then, it had a market value of $3.9 billion; now, thanks to acquisitions and a surging stock price, it's worth $45 billion.

WellPoint shares were trading last week for around $74, up 28 percent for the year. Since the IPO, company shares have risen 310 percent, compared with about 15 percent for the S&P 500.

And analysts are betting there's plenty of gas left in the tank. CIBC World Markets Corp. says shares may hit $82 in the next 12 to 18 months. Other analysts say nearer term they could move into the mid- or upper $70s.

Why so upbeat? Analysts say the company is only beginning to reap the benefits from its $20.8 billion purchase last year of fellow Blue Cross/Blue Shield provider WellPoint Health Networks Inc. of California-a deal that created the nation's largest health insurance company.

"With its titanic mass, WellPoint is gaining new earnings traction from enhanced buying power, administration of economies of scale, and product sales synergies," Prudential Equity Group analyst David Shove said in a report.

The Indianapolis company, which adopted the WellPoint moniker after the deal closed, expects to reap $250 million in annual cost savings from the deal, though many analysts think actual savings will be larger.

More important, the combined company has the No. 1 market share in Indiana and 11 other states where it hawks insurance under the Blue Cross/Blue Shield name. Analysts say WellPoint uses that dominance to cull better data on health care use and extract larger discounts from providers.

The company's heft also gives it an edge when competing to provide health insurance to national companies.

Other factors are lifting the entire industry. Because America's population is aging and medical advances are leading to more treatment options, health care costs are expected to continue increasing faster than the economy as a whole.

"We think WellPoint is well-positioned for continued growth," Legg Mason analyst Thomas Carroll said in a report. His target price for the stock is $78.

SG Cowen analyst Edmund Kroll Jr. estimates WellPoint this year will earn $2.5 billion on operating revenue of $45 billion. The following year, he projects profit will jump to $2.9 billion on operating revenue of $49 billion.

There are no guarantees, of course. Combining two big companies is a Herculean task fraught with risk. Analysts say efforts to integrate the companies could distract managers from nuts-andbolts operations.

But so far, Larry Glasscock, Well-Point's even-keeled CEO, hasn't disappointed.

Not only has he built the largest company in the health insurance industry; he's made investors a bundle. Anyone who spent $3,600 to buy 100 shares during the IPO now is sitting on more than $14,000.

Finish Line stumbles

Investors gave Finish Line Inc. a spanking last week after the Indianapolis company reported a rare dip in same-store sales and said it expects to post a small loss in the next quarter.

On the day the company announced the disappointing news, Finish Line shares slid $2.06, or 13 percent, to close at $14.06.

Slowing sales industrywide already had taken the bloom off the stock. It's now down $9.33, or 40 percent, since March.

"There's really no 'got-to-have' sneaker for back to school," forcing retailers to compete more on price, Heather Boksen, an analyst with Sidoti & Co. in New York City, told Bloomberg News.

In a statement, Finish Line CEO Alan Cohen said: "The promotional environment in the mall has been increasing weekly, and we have responded with increased price promotions in our stores to remain competitive."

Long term, Finish Line shares remain a winner. Over the past 10 years, its shares have appreciated more than 570 percent. That compares with 120 percent for the S&P 500.
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