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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week


March 4th 2011 WellPoint
NYSE Symbol: WLP
Industry: Healthcare
Price as of 3/4: $67.99

The markets vacillated back and forth this week debating which was more important, the better than expected economic data or the unrest and tensions in the Middle East. The markets are in the third year of this bull market which traditionally means investors rotate out of small caps into big caps and look for more defensive blue chip stocks. This week we'll feature a healthcare stock that has performed great since the start of the year. The featured stock of the week is the largest U.S. HMO, WellPoint. Under its popular Blue Cross and Blue Shield umbrella, WellPoint has performed well of late thanks to improving fundaments, an upgrade this week, and an ex-dividend coming next week. Even with the recent run up, WellPoint still looks attractive with strong long term fundamentals.

Back in January, WellPoint reported fourth-quarter net income of $548.8 million a share beating estimates, but down from last year when the company sold their NextRx pharmacy benefit management subsidiary for a substantial profit. Adjusted net income for the fourth quarter came in at $1.33 per share verse $1.16 a year ago beating estimates by 10 cents. Revenue for the quarter fell 4.3% to $14.42 billion due in part to a one percent decline in subscribers to 33.3 million members under their Blue Cross Blue Shield plans. For the full year, WellPoint earned $2.89 billion, or $6.94 per share. Operating revenue fell to $57.84 billion from $60.83 billion. Looking forward, WellPoint provided conservative guidance for 2011 with earnings estimates of $6.30 verse $6.58 consensus estimates. Part of the reason for the conservative estimates was due to the continued low interest rates which will reduce investment income. The insurer also expects a $300 million hit from a new health overhaul measure that starts this year. Health insurers are now required to spend minimum percentages of their premiums on medical care or offer rebates to consumers. Unemployment, which has also hurt insurer membership, has leveled off, but isn't expecting to significantly improve this year.

Just this week WellPoint updated their business fundamentals saying they have already more than doubled the enrollment gains for its national accounts of large employers. That will only help the bottom line. The company initially expected to add 200,000 members from that business segment but has already gained 450,000 new subscribers. That news sparked a rally in the stock earlier in the week.

Even with the recent run up in the stock,
WellPoint still trades for just 10.4 times this years earnings and 9.4 times next years earnings. The stock also trades for less than one times sales and just over one times book value of $63 a share. The book value has jumped 28% since we featured the stock back in November 2009. Going forward, the book value won't jump so dramatically, but should continue to grind higher. When we last featured WellPoint Jim Cramer from CNBC was looking for a price target of $91 a share. We all know that Cramer is prone to change his mind quite often, but this week Stifel Nicolaus upgraded the stock with a $84 price target translating into a 23% return from current levels not including their dividend which was just reinstated. While not a great dividend stock with a yield of only 1.4%, WellPoint does go ex-dividend next week on Tuesday for 25 cents a share.

WellPoint is an attractive blue chip stock in a defensive sector that provides a dividend to investors willing to buy the stock on Monday.