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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


November 6th 2009 Wellpoint
NYSE Symbol: WLP
Industry: Healthcare
Price as of 11/5: $50.90

The volatilty is back in the stock market. Up a 100 points one day, down 100 points the next day. One sector that has seen a number of down days is healthcare. The President's agenda to overhaul healthcare has wrecked havoc on the sector keeping the stocks depressed as many money mangers stay on the sidelines. This weeks political elections with a number of Republicians winning may help stall the healthcare reform, improving the prospects for the health insurers. This week we'll feature one of the largest HMOs, Wellpoint. One of every nine Americans or 35 million members are affiliated with Wellpoint's health plan. The company continues to churn out profits even though the stock continues to move sideways. Recently Jim Cramer on CNBC pounded the table on Wellpoint expecting an upside surprise to earnings next year. Whether this prediction comes true or not, Wellpoint provides good value trading just above it's book value.
The largest healthcare provider by membership, WellPoint reported earnings in the last week of October. Net income fell to $730.2 million, or $1.53 per share, from $820.7 million, or $1.60 per share a year earlier. The latest results included a charge. Excluding the charge and investment gains, the company's earnings of $1.78 per share easily beat estimates by 41 cents. The 11% drop in profits was caused by Americans losing their jobs and lost insurance coverage. But thanks to favorable medical costs, plus changes to its Medicare plans, and the shedding of unprofitable Medicaid contracts, Wellpoints earnings beat estimates. Revenue slipped 0.7% to $15.21 billion but were higher than the $15.15 billion expected by analysts. Going forward Wellpoints was cautious, as they should be, since there is no clarity regarding Washington's healthcare reform. Wellpoint expects higher medical costs for the full year, owing in part to expenses tied to the flu and Cobra coverage for workers who lost their jobs. For 2010, Wellpoint forecasted lower operating earnings, repeating its bearish view for 2010, although it put off giving details until early next year. WellPoint is following UnitedHealth Group in reporting better-than-expected third-quarter results while expressing caution about 2010.
As a result, investors remain on the sidelines and the stocks keeps moving sideways even as earnings keep rising. The valuation remains very cheap. Wellpoint is trading for 11 times earnings, 0.36 times sales, and one times book value of $49.17. The company provides no dividend, but with the stock trading at its' book value, there should be little downside with good upside when the fears of the healthcare reform subside. Recently an analyst at Leerink Swann raised his 2010 earnings to $6.03 from $5.95 a share. The analyst predicts that the recent rise in Cobra costs would prove to be temporary. The analyst believes the stock offers significant long-term upside opportunity and significant room for multiple expansion once healthcare reform is resolved. The analyst's target is $61 a share. As mentioned, CNBC's Cramer predicts $6.50 in 2010 earnings per share for the company, and with a historic 14 price-to-earnings multiple, that should propel the shares to Cramer's new target of $91 a share. It should be mentioned that Cramer is known to change his mind, flip flopping on stocks quite often. Having said that, the risk reward remains compelling for Wellpoint's stock.