Aetna: Slower Growth Ahead?

The shares declined Thursday amid investor concerns over the strength of future profits

Wall Street shrugged Feb. 8 after Aetna (AET) reported fourth quarter net income of 80 cents per share, up 14% year-over-year. The health insurance heavyweight's numbers reflect growing enrollment and higher fee and premium costs.

Despite these trends, the stock fell 2.5% to $42.91 in late-afternoon New York Stock Exchange trading Feb. 8. The results follow a very strong third quarter when the company racked up net income of 85 cents per share.

In a press release to accompany the fourth quarter numbers, Aetna CEO Ronald Williams said the company's further growth would include programs targeting uninsured consumers including "students and part-time and hourly workers." At the end of 2006 Aetna had a total membership of 15.4 million up 5% in 2006.

In the wake of the news, Standard & Poor's downgraded shares of the Hartford (Conn.)-based company to hold from buy on slowing operating growth and the company's increased reliance on share buybacks to prop up EPS growth. Aetna's numbers for the quarter essentially met analyst expectations. Some skepticism remains over the company's growth prospects and Aetna's ability to keep raising its premiums.

The competition in the health insurance space is furious. A recent S&P report says that Aetna's advantages include a wide array of insurance options offered to customers, At the end of 2005 Aetna had the third highest enrollment of health plan providers out of 652 for-profit and non-profit organizations in the U.S. Best known as a health plan provider for employers it is also expanding into individual plans. Major competitors include UnitedHealth (UNH), CIGNA (CI), and WellPoint (WLP).

On the other hand, Aetna's variety could also be seen as a hindrance. In a Morningstar report from December analyst Brandon Troegle wrote that "the company operates in many different markets where it will need to accurately address the profitability of members and adjust rates accordingly."

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