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WellPoint 'too cheap to ignore'

March 19, 2012

Miscues by WellPoint Inc.’s executives have, over the past year, depressed the health insurer’s stock price nearly 20 percent.

That’s the upshot of analyst opinions gathered by Barron’s magazine in a March 15 article.

"At the end of the day, it's not unreasonable that WellPoint could be an $80 stock and, along the way, you get paid a dividend," Stifel Nicolaus analyst Tom Carroll told Barron’s reporter Johanna Bennett.

That’s where WellPoint’s stock was trading in June, before all health insurers suffered a plunge. Since then, however, WellPoint’s recovery has been far weaker than that of its key competitors: Minnesota-based UnitedHealth Group, Connecticut-based Aetna Inc. and Louisville-based Humana Inc.

Trading currently at less than $68 per share, Bennett wrote, “WellPoint is too cheap to ignore.”

But most investors are waiting for WellPoint to actually prove that it no longer suffers from problems in its Medicare business. That unit last year lost $150 million after a Medicare plan in Northern California took on numerous high-cost seniors when a competitor exited the market.

In January, company executives tried to reassure investors that the problems were behind it and would not be an issue in 2012. But not all analysts were convinced.

In February, WellPoint dismissed Brian Sassi, the man who led its Medicare business, and replaced him in March with a former Humana executive.

"It's a show-me stock," Marshall Gordon, an analyst with ClearBridge Advisors, told Barron’s. "The stock is undervalued if WellPoint executes."

That “if” question, in addition to investor skittishness about the U.S. Supreme Court’s decision on the 2010 health reform law, are the key things weighing on WellPoint’s stock.

Investors worry that the court might strike down the law’s mandate that nearly all Americans buy health coverage, while leaving in place a second mandate that health insurers take all comers—regardless of their health status.

Having the second mandate without the first could severely crimp health insurer profits.

Those fears, if realized, could drive WellPoint’s shares down to $62 apiece after the Supreme Court’s ruling comes down, likely in June, said Dave Shove, an analyst with BMO Capital Markets.
 

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