Wellpoint’s Acquisitive Side

DANIEL GENTERPRESIDENT AND CEORNC GENTER CAPITAL MANAGEMENTCOMPANY: WellpointTICKER: WLP (NYSE)PRICE: $72 (as of 4 p.m. yesterday)52-WEEK RANGE: $58.20-$80.40MARKET CAPITALIZATION: $47.3 billionDaniel Genter is the president and CEO of RNC Genter Capital Management, which manages about $2.2 billion on behalf of high net-worth individuals and institutions. Wellpoint is a commercial health benefits company. Mr. Genter spoke to David Dalley of The New York Sun about why he believes the stock could increase by at least 20% over the next 18 months.What does Wellpoint do?They’re the largest publicly traded, commercial health benefits company, from a membership standpoint, in the U.S. They administer health care plans for the Blue Cross in California, and they service the Blue Cross and the Blue Shield in Colorado, Connecticut, Georgia, Indiana, and a few other places. They’ve been a very aggressive consolidator, and last year they bought a company called Anthem, which made them the biggest managed health care company around.Why do you like the stock?We like that they’re growing and very acquisitive, that they’re the largest at what they do, and that now some of their costs are beginning to come down. That will allow them to have a fairly steep acceleration in earnings growth going forward. We estimate growth in earnings-per-share over the next three to five years at around 16% per year. Yet they’re trading at a market multiple of around 15 times forward earnings. Their multiple is about in line with the industry, but their growth rate is much faster.The stock price pulled back a bit with the overhang from the United Health controversy but it has still been doing extremely well. Over the last 200 days, it’s moved from $68 to $80.What was the overhang from United Health?The CEO of United Health is being looked at in relation to various excess compensation issues and that is affecting the whole managed health area. The whole market gets nervous. The question is, is the problem industry-related, or company-specific? We feel that in the case of United Health, it’s a very company-specific situation and has nothing to do with Wellpoint or some of the other providers in the industry, but they’re falling under the black cloud anyway. So you have a pullback with no fundamental change, which equals a good entry point.What’s driving growth?They have good organic growth with their core business, plus the Blue Cross and Blue Shield brand names are very strong, which attracts lots of new members. We’re expecting the medical enrollment in their program to exceed 29 million this year. The recent merger worked out very well, too, and will be accretive to earnings in 2006. And the fact that a few companies in the industry have had some shortfalls is really a plus, because it allows them to continue capturing additional market share.What do you believe the stock’s worth?Right now we think that full valuation would be at around $101.A fair value that we feel the stock should easily be able to get to is about $86 over 18 months.Our potential downside is around $65. Right now it’s at $72.What are the risks?Well, even though they don’t need acquisitions to grow, it would be nice to see them make a few more. Their growth rate could become impinged if they’re totally reliant on organic growth. A spike in medical costs could curtail growth, too, but we don’t see much else that would interfere with the projected 15% growth rate.

Wellpoint’s Acquisitive Side

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