WellPoint Inc.WLP

Morningstar Rating

Stock Research and Analysis

by Matthew Coffina

In our view, WellPoint's stock first became a bargain in 2008, as the market overreacted to margin contraction caused by premium increases failing to keep pace with rising medical costs. We think pricing issues have subsided, but an even bigger threat has emerged: major health-care policy reform. Read more

Bulls Say

WellPoint has the largest medical membership among health insurers, giving it significant bargaining power with health-care providers and leveraging its largely fixed cost structure.

In opposing the creation of a new public insurance option, managed care companies should find allies in doctors, hospitals, drug-makers, device-makers, and conservatives.

Some proposed health-care reforms would be a net positive for WellPoint. The company is strong in the individual and small-group market, and it could gain a large number of customers as efforts are made to reduce the number of uninsured Americans.

WellPoint enjoys the best-known and most-trusted brand name in the business. It is the exclusive licensee of the Blue Cross and/or Blue Shield brands in 14 states.

Unlike its peers in other states, WellPoint doesn't have to compete with nonprofit Blue Cross and Blue Shield plans. Read more

Bears Say

President Obama and the Democrat-dominated Congress are looking to enact major health-care policy reform in 2009. Some reform proposals would fundamentally undermine WellPoint's business model.

Medicare controls over $450 billion of health-care spending, giving it better administrative cost leverage and much lower provider rates than any private MCO. A new public plan linked to Medicare would have significant competitive advantages.

Management reduced its 2008 earnings forecast twice because it underestimated medical cost inflation. This could indicate weak underwriting ability and a failure to control costs.

Rising unemployment results in a smaller market for employer-based insurance, and fewer members can result in deleveraging of WellPoint's fixed costs.

WellPoint's $15 billion investment portfolio could lose value if financial markets decline. Read more

Strategy

WellPoint has refocused its attention on the core medical benefits business, having agreed to sell its pharmacy benefits management business to Express Scripts ESRX. Most of the company's sizeable free cash flow is directed to share repurchases, although WellPoint could also be interested in acquisitions, especially of for-profit Blue Cross and Blue Shield plans. Read more

Management

WellPoint experienced significant management changes in 2007, but its history of creating shareholder value and generally favorable governance practices lead us to assign it a good Stewardship Grade. In June 2007, chairman and CEO Larry Glasscock retired from the CEO post for personal reasons after eight years on the job. Read more

Profile

WellPoint is the largest U.S. health insurer by medical membership, serving 35 million people. It holds the exclusive license to the Blue Cross and/or Blue Shield names in 14 states, including California, Georgia, New York, and Ohio. Read more

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