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Disappointing quarter puts WellPoint brass on hot seat

February 11, 2012
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Wall Street analysts never have been as comfortable with WellPoint Inc.’s current management team as they were with the previous regime, led by CEO Larry Glasscock, who resigned unexpectedly in 2007.

That helps explain some of the biting comments uttered by analysts, and included in their research reports, following the company’s Jan. 25 release of fourth-quarter results that fell well short of Wall Street expectations.

“Poor execution by the company and not industry trend responsible for a soft 4Q11, highlighting the talent management challenge that has weighed on WLP stock valuation the past 5 years,” Credit Suisse analyst Charles Boorady wrote.

In a Bloomberg interview, Susquehanna Financial Group analyst Chris Rigg added: “Management credibility is a concern at this point. It may take a while to regain investor trust. They misjudged market trends while others did not.”

Excluding investment losses, the Indianapolis-based health insurance giant earned 99 cents per share for the quarter, short of the $1.12 per-share forecast by analysts, according to a survey by Thomson Reuters. Overall profit was $335 million, down 39 percent from a year ago.

Dragging down results was the company’s Medicare Advantage senior business, which turns out to have priced its coverage too cheaply, especially in California. The company said in its earnings release that it has “refined” its Medicare Advantage products and pricing to adapt to higher-than-expected costs.

Medicare Advantage is part of WellPoint’s Consumer Business. Company officials said the problems with senior coverage were almost entirely to blame for a $4.6 million fourth-quarter loss in that unit. A year earlier, Consumer generated a $112 million gain in the fourth quarter, 17 percent of the company’s total.

Company officials in July also reported struggles with the senior business. They said problems were most severe in northern California, where a competitor pulled out, leaving WellPoint with a higher-than-expected concentration of customers who generated more in claims than they contributed in premiums.

CEO Angela Braly said on a Jan. 25 conference call with analysts that management changes should help improve results this year. She said WellPoint also will benefit from its recent $800 million purchase of Caremore Health Group, a Medicare specialist based in California, and the executive firepower that comes with it.

“We hear you,” Braly said in response to a question about the “spotty” performance of the senior business. “The brand is attractive to seniors. We think that this is an asset that we have in our portfolio that can make a big difference.”

But analysts note that most competitors, such as Minnesota-based UnitedHealth Group Inc., have avoided similar problems in their senior products. In fact, this is a period of tranquility for the industry, which is benefiting from customers’ use of health care services growing at lower-than-expected rates.

Because of its surprisingly weak results in its senior business, WellPoint “has a meaningfully higher risk profile than peers who have generally delivered strong, consistent results,” Jefferies analyst David Windley said in a report.

Investor skepticism is reflected in WellPoint’s stock price, which is around $65, down 6 percent since the earnings release. The shares have swooned 20 percent since reaching their 52-week high of $81.92 last May.

Because of the decline, WellPoint is trading at a discount to its peers, and some analysts point to it as a buy.

Others, though, say the company has stumbled too often to gain their unabashed support yet.

“It’s a story we’ve seen multiple times here and, for seemingly a variety of reasons, the senior business continues to be a challenge for the company,” J.P. Morgan’s John Rex said in a report.

“We’re hoping we can get some more consistency here, but we’re not certain given the track record.”

HHGregg’s silver lining

HHGregg Inc. shares got a nice bump after the company announced fiscal third-quarter results Feb. 8—even though profits were sharply below a year earlier.

The company earned $22.5 million in the three months ending Dec. 31. That compared with profit of $26.9 million in the same quarter a year earlier.

The figures weren’t a surprise. The company in January pre-announced the disappointing profit, blaming it on shrinking profit margins in the ultracompetitive video market. But what stoked investors were market-share gains—especially in appliances, which enjoys fatter margins.

In the hours after the earnings report, HHGregg shares rose 7 percent, to $11.30.

“We gained market share in every single business that we were in. We were very pleased with that,” CEO Dennis May said on a Feb. 8 conference call with analysts.

He added: “As the competitive landscape became more aggressive during the holiday season, we elected to remain competitively priced. Though we were pleased with our increased traffic, we expect to make modifications to our plan in the upcoming seasons to strike the appropriate balance between driving traffic and profitability.”•

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