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Despite Regulation, Transparency and Competition, Aetna Looks Competitive in the Industry

August 29, 2014 | About:

In this article, let's take a look at Aetna Inc. (NYSE:AET), a $29.05 billion market cap company that offers a broad range of traditional, voluntary and consumer-directed health insurance products and related services.

Membership base

Aetna has a sizable membership base, which gives it significant competitive advantages. These competitive advantages should allow the company to remain profitable in the industry. Talking about the industry, we think it will become more transparent, competitive and cost effective because of the implementation of exchanges and standard insurance policy formats. It is also true that only companies with large membership bases will be able to earn higher profits.

Opportunity to expand

The individual membership constitutes less than 5% of its total membership so we believe that Aetna should expand this segment. Further, the firm has a large membership base to negotiate good prices with providers.

These expansions will generate a lower level of profitability due to growing competition in the individual market and its relatively higher level of servicing costs provide lower gross profits.

New markets

The company focuses on geographic reach that should allow it to participate in new exchanges. The company plans to expand its affordable and quality health care cover internationally. Its plans to expand operations in Asian markets like India and China, both countries present huge potential growth. This segment is expected to grow faster than others.

Revenues, margins and profitability

Looking at profitability, revenue growth by 25.84% led earnings per share increase in the most recent quarter compared to the same quarter a year ago ($1.52 vs $1.49).

The net income growth from the same quarter one year ago has exceeded that of the S&P 500 and the industry average. The net income increased by 2.4% when compared to the same quarter one year prior, from $536.00 million to $548.80 million.

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.



ROE (%)





Cigna Corp.



Humana Inc.



UnitedHealth Group Inc.



Health Net Inc.



WellPoint Inc.



Industry Median


The company has a current ROE of 13.64% which is higher than the industry median. In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking at those levels or more, UnitedHealth Group Inc. (NYSE:UNH) could be the option. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.


Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 14.3x, trading at a discount compared to an average of 19x for the industry. To use another metric, its price-to-book ratio of 1.98x indicates a discount versus the industry average of 2.01x while the price-to-sales ratio of 0.55x is above the industry average of 0.52x.

As we can see in the next chart, the stock price has an upward trend in the five-year period.


Final comment

As outlined in the article, the sizable membership base gives competitive advantages in order to maintain profitability. We see expansion in new markets as a growth driver to the future as well.

According to Yahoo! Finance, the estimated one-year target share price is $89.37 so if you buy shares at the current market price ($81.92), your return from price appreciation would be 9.1%. In addition, you have to consider any cash flow received by the asset. So for holding the stock one year, you'll be paid a dividend of 22.5 cents per share each quarter, totalizing $0.9 at the end of the year. If we divide this number by current price per share, we obtain the dividend yield, which is the other component of the return on investment for a stock, and in this case is 2%. So the total return for investing in Aetna is 19.8%.

Hedge fund gurus like Louis Moore Bacon (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Ray Dalio (Trades, Portfolio), David Dreman (Trades, Portfolio), Richard Pzena (Trades, Portfolio) and John Buckingham (Trades, Portfolio) added this stock to their portfolios in the second quarter of 2014.

Disclosure: Omar Venerio holds no position in any stocks mentioned

About the author:

Omar Venerio is capital markets, derivatives, corporate finance and financial management professor. He is passionate about the stock market and providing independent fundamental research and hedge fund and insider trading-focused investigation.

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