Reinstate Aetna at Buy following Coventry acquisition
via Goldman Sachs
We have removed the NR designation from Aetna Inc. (NYSE:AET) shares. Aetna is now added to the Buy List with a 12-month price target of $68. Following acquisition of Coventry Health Care, Aetna has greater regional commercial market breadth/strength and is now much better positioned to leverage Medicaid and dual eligible growth opportunities. We also see further upside from Coventry Health Care, Inc. (NYSE:CVH) merger synergies in 2013-2016. Business mix also positions Aetna as relatively defensive against health reform downside risks. For this year, we expect Aetna will continue to benefit from favorable sector pricing and medical utilization trends. Finally, valuation looks compelling at just 9x our revised 2014 EPS of $6.50.
Downgrade WellCare to Neutral from Buy on MA downside
We have downgraded WellCare Health Plans, Inc. (NYSE:WCG) to Neutral from Buy as we further orient away from downside risks to Medicare Advantage (MA)-driven earnings (MA is about one-third of WCG total earnings). Since upgrading WCG to Buy on May 20, 2009, the stock is up 178% (vs. managed care +127% and the S&P 500 +84%).
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While WellCare Health Plans’ MA exposure is not new, the process of MA rate finalization revealed more vulnerability on the risk recalibration rate factor for 2014. Combined with the slow pace of STAR quality score improvement at WCG, these factors largely offset the near-term benefit of WCG all-HMO product position, in our view. While we continue to see WellCare Health Plans, Inc. (NYSE:WCG) as among the best positioned for Medicaid and dual eligible growth, we think that growth will be largely offset by declining MA earnings (down 25% next year and another 30% in 2015, according to our MA model). Our revised 2014 EPS of $5.50 (prior $5.75) and 2015 EPS of $6.30 (prior $6.65) now more fully reflect our updated view of the impact of MA reimbursement pressure.
Revising price targets and M&A probability rankings We have revised our 12-month price targets for selected managed care names as we roll-forward our sum-of-the-parts valuation model to our 2014E earnings view. In addition, we have lowered our M&A probability rank for Medicaid names (CNC, MOH, WCG) to “2” from “1” to reflect our view of less near-term likelihood of large-scale acquisitions during health reform implementation (at least for the next 12-18 months).
Further reading Aetna Acquires Coventry for $7.3B in the Latest Healthcare M&A
AET Buy Aetna Initiated With Buy By Goldman Sachs