The Zacks Analyst Blog Highlights: Comcast, Aetna, Humana, CIGNA and WellPoint

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May 01, 2012, 09:30 ET

CHICAGO, May 1, 2012 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include Comcast Corp. (Nasdaq: CMCSA), Aetna Inc. (NYSE: AET), Humana Inc. (NYSE: HUM), CIGNA Corp. (NYSE: CI) and WellPoint Inc. (NYSE: WLP).

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Here are highlights from Monday's Analyst Blog:

Earnings Preview: Comcast

Comcast Corp. (Nasdaq: CMCSA) is slated to release its first quarter 2012 results on Wednesday, May 2, 2012, before the opening bell. The current Zacks Consensus Estimate for the first quarter is pegged at 43 cents per share, representing annualized growth of 18.13%.

With respect to earnings surprises over the trailing four quarters, Comcast has outperformed the Zacks Consensus Estimate in three of the last four quarters. The average earnings surprise was 0.68%.

Fourth Quarter Recap

On February 15, 2012, Comcast reported its fourth quarter 2011 financial results. GAAP net income for the fourth quarter of 2011 was $1,287 million or 47 cents per share compared with a net income of $1,018 million or 36 cents per share in the prior-year quarter. However, quarterly EPS of 47 cents was ahead of the Zacks Consensus Estimate of 43 cents.

The fourth-quarter 2011 total revenue came in at $15,042 million, up 54.7 % year over year, and well above the Zacks Consensus Estimate of $14,809 million. Operating margin in the fourth quarter of 2011 was 19.4% compared with 20.7% in the prior-year quarter.

Agreement of Estimate Revisions

In the last 30 days, out of the 19 analysts covering the stock, two analysts increased the EPS estimate for the first quarter of 2012 while two reduced. Similarly, for the second quarter of fiscal 2012, out of the 18 analysts covering the stock, three analysts revised the estimate upwards while one analyst came down.

For fiscal 2012, in the last 30 days, out of the 21 analysts covering the stock, five analysts raised the EPS estimate but one reduced. Likewise, for fiscal 2013, out of the 19 analysts covering the stock, five analysts increased the EPS estimates while only one moved in the opposite direction.

Magnitude of Estimate Revisions

During the last 30 days, the current Zacks Consensus Estimate was just a penny above the previous estimate of 42 cents for the first quarter of 2012, while for the second quarter of 2012 the current Zacks Consensus Estimate wasjust a penny above the previous estimate of 42 cents.

Likewise, for fiscal 2012, the current Zacks Consensus Estimate was 2 cents above the previous estimate of $1.86. Similarly, for fiscal 2013, the current Zacks Consensus Estimate was 2 cents above the previous estimate of $2.19.

Earnings Surprises

The current Zacks Consensus Estimate for the ongoing quarter contains a 2.33% downside potential but the same for the second quarter of fiscal 2012 reflects a 2.04% upside potential (essentially a proxy for future earnings surprises). However, fiscal 2012 has the Zacks Consensus Estimate downside risk of 1.06% but the growth potential is 1.36%.

Our Recommendation

Comcast is becoming a media powerhouse armed with its unique control over both content and distribution after completing the acquisition of a controlling stake in NBC Universal. The company is also aggressively deploying the DOCSIS 3.0 (also called Wideband) technology to upgrade its existing customers to high-speed network together with all digital networks.

However, we believe that Comcast is fairly valued at current levels as the stock price has moved up by a whopping 56% last year.

S&P Positive on Aetna

Following Aetna Inc.'s (NYSE: AET) first quarter earnings release, the rating agency Standard and Poor's undertook a favorable rating action on the health insurer's creditworthiness. The agency raised the financial strength ratings of the company's subsidiaries by one notch to "A+" from "A," while affirming the A-/A-2 counterparty credit rating on the parent company. All these ratings are of investment grade and carry a positive outlook.

The financial strength and credit ratings of a company are important metrics to determine its ability to fulfill policyholder obligations. These also affect investor confidence in the company's potential and its competitiveness.

An investment-grade debt rating with a positive outlook reflects optimism about Aetna's future performance. A positive outlook implies that the company's rating may be raised over the following 12-month period.

S&P was particularly impressed with Aetna's sound balance sheet, favorable operating results, strong cash flow generation, sufficient liquidity and financial flexibility. According to S&P, Aetna is on a stronger footing compared with its peers Humana Inc. (NYSE: HUM), CIGNA Corp. (NYSE: CI) and WellPoint Inc. (NYSE: WLP). It also noted that the gradually improving health insurance marketplace will further strengthen the company's position.

The rating agency noted that despite significant Health Care Reform uncertainty, Aetna was able to secure its operating margins.

Aetna's ratings may be raised another notch, if the company performs in line with the earnings expectations of the rating agency. The rating agency expects Aetna's total revenue to be more than $36 billion, medical membership of 18.5 million (which is higher that Aetna's guidance of 18.2 million members), pretax GAAP operating income in the range of $2.6–$3.0 billion and cash flow in the range of $3.4–$3.6 billion

S&P maintained the rating of the parent company two levels below the core operating units (generally the rating agency keeps a difference of three notches between the parent and the core operating units). The two-notch gap in the ratings reflect consistent dividends from Aetna's diversified units, which minimize fluctuations in cash flow from the subsidiaries to the holding company.

S&P expects the company to get $1.7 – $2.0 billion in dividends from its subsidiaries, while Aetna expects subsidiary dividend of approximately $1.7 billion.

On the flip side, the rating agency pointed out that Aetna remains exposed to industry risks related to the Supreme Court hearing on the Health Care Reform and its negative impact on the health insurer, if any.

We are confident that the health insurer major will see a favorable rating outcome going forward, given the pace at which it is evolving. The company has made considerable investments in products and technology, with an intention to extend its core health business and also to capitalize on exciting new consumer and provider opportunities emerging in the marketplace.

Aetna's strong operating results and significant capital generation will allow it to make further investments. The company is expected to continue performing well in 2012 backed by the performance of the Medicaid and Medicare segments, a fast growing health services segment and a strong balance sheet.

Aetna currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Considering its better-than-average fundamentals, we are maintaining our long-term Outperform recommendation on the shares.

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