Overview: Glenview Capital Management's 1Q14 positions

Part 2
Overview: Glenview Capital Management's 1Q14 positions (Part 2 of 6)

Why Glenview Capital starts new position in WellPoint

Glenview Capital starts position in WellPoint

Larry Robbins’ Glenview Capital added new positions in WellPoint Inc. (WLP), Hertz Global Holdings Inc. (HTZ), eBay Inc. (EBAY), and Applied Materials Inc. (AMAT). The largest position sold was Xerox (XRX).

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Glenview Capital started a new position in WellPoint Inc. (WLP) that accounts for 2.76% of the fund’s portfolio. Glenview said it is bullish on health maintenance organizations (or HMOs). It also started a small position in health insurer UnitedHealth Group (UNH) and significantly upped positions in WellPoint peers Humana (HUM) and Aetna (AET) last quarter. Robbins outlined his investment thesis on Humana and Wellpoint in a presentation at the 19th Annual Sohn Investment Conference in New York in May.

According to Glenview’s presentation slide, WellPoint announced the sale of its pharmacy benefits management (PBM) assets and operations for the next ten years to Express Scripts for $4.7 billion in 2009. Glenview expects WellPoint to reclaim the business and unlock PBM value, “which could happen as early as 2017.”

WellPoint business overview

WellPoint is the second-largest U.S. health insurer. It served 36.9 million medical members through its affiliated health plans and around 66.8 million individuals through all subsidiaries as of March 31, 2014. The company is an independent licensee of the Blue Cross and Blue Shield Association (or BCBSA)—an association of independent health benefit plans. Its managed care plans including preferred provider organizations (or PPOs); health maintenance organizations (or HMOs); point-of-service (or POS) plans; traditional indemnity plans and other hybrid plans, including consumer-driven health plans (or CDHPs); and hospital only and limited benefit products.

The insurer has three reportable segments including Commercial & Specialty Business, comprised of the Local Group, National Accounts, Individual and Specialty businesses; Government Business, comprised of the Medicaid and Medicare businesses, National Government Services, and the Federal Employee Program; and Other, comprised of unallocated corporate expenses and certain other businesses that don’t meet the quantitative thresholds for separate reportable segment disclosure.

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Wellpoint’s growth driven by increased enrollments

Wellpoint’s fourth-quarter earnings in January were slightly ahead of estimates, but revenue fell short of consensus. 4Q13 net income was $148.2 million, or $0.49 per share that reflected an impairment charge sale of its contact lens division, 1-800 Contacts, to P.E. firm Thomas H. Lee Partners. Revenue came in at $17.65 billion compared to $15.17 billion in 4Q12.

However, shares spiked when Wellpoint said it added around 500,000 new customers since the Obamacare enrollment began on October 1, 2013, despite website technical issues. It also noted that the early enrollment data suggested that older individuals enrolled as compared to its legacy individual consumers. However, these were in line with the company’s projections and pricing for the new policies, Wellpoint’s management added on its 4Q earnings call.

In March, Wellpoint “raised its full year 2014 earnings outlook from “greater than $8′ per share to ‘greater than $8.20′ per share.” It said, “Our updated outlook reflects solid growth in membership, revenue and operating earnings. Our outlook also remains prudent in light of the dynamic nature of the marketplace, and we believe this is a point from which we will grow in the future.”

For the recent 1Q14, profits fell but met consensus. It reported net profit of $701 million, or $2.40 per share, down from $885 million, or $2.89 per share, a year earlier. The decline was due to “continued costs incurred associated with Health Care Reform market changes.” Operating revenue, which missed estimates, exceeded $17.6 billion in 1Q14, an increase of approximately $210 million, or 1.2%, compared with approximately $17.4 billion in same quarter the previous year. Medical enrollment totaled approximately 36.9 million members at March 31, 2014, an increase of approximately 1.3 million members, or 3.6%, from 35.7 million at December 31, 2013.

Wellpoint is bullish on enrollments, revises outlook

Wellpoint said it expects the enrollment to reach three million by 2018. It said it expects medical enrollment to grow by 1.3–1.4 million members for the full-year 2014. Full-year 2014 Generally Accepted Accounting Principles (or GAAP) net income is expected to be greater than $8.50 per share, including $0.10 per share of net favorable items from the first quarter.

Wellpoint recently softened its stand on its March prediction of “double-digit increases” in its proposed 2015 premium rates that needs to be submitted in advance to government regulators. When asked on the rate increases in the 1Q earnings call, the management said, “It’s not an easy one to answer because it’s going to vary by market, by product.” On the age of enrolled members, the management said it’s seen the “average age (of enrollment) coming down in a meaningful fashion,” adding that “only time will tell but relative to the average age we’ve seen in that, we have hit the sweet spot.” They further said that, “And we think because we get the sweet spots, there will be less volatility in pricing for our members than there would be for others.”

According to a report in Bloomberg, which cited an announcement by President Barack Obama, around 7.1 million people have signed up for private plans under the Patient Protection and Affordable Care Act by the close of the first enrollment period on March 31. The report added that more younger people have signed up for the plans, abating concerns of insurers because premiums from younger, healthier participants can offset costs of old and sick members.

Wellpoint drives shareholder value

For the full-year 2013, Wellpoint repurchased 20.7 million shares of stock, or 6.8% of the shares outstanding as of December 31, 2012, for approximately $1.6 billion, or a weighted-average price of $78.08. As of March 31, 2014, the company had approximately $2.4 billion of board-approved share repurchase authorization remaining. Cash dividend payments totaled $448.0 million in 2013. On April 29, 2014, Wellpoint declared a 2Q14 dividend to shareholders of $0.4375 per share. On an annualized basis, this equates to a dividend of $1.75 per share.

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