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Zacks.com

Following the release of third-quarter results on November 5, 2010, the majority of the analysts covering Coventry Health Care Inc. (CVH) have moved their estimates upward over the last 30 days for the fourth quarter of 2010, the first quarter of 2011 and the fiscal 2010 and 2011.

Earnings Review

The company performed impressively in the third quarter with earnings of $1.24, beating the Zacks Consensus Earnings Estimate by 57 cents, and exceeding the year-ago earnings by 56 cents, helped by a sharp decline in medical costs. The company also raised its 2010 guidance for adjusted earnings and revenue.

Coventry’s earnings in the reported quarter were $1.24 per share, excluding 5 cents per share on account of a favorable impact of the Medicare Advantage Private Fee-for-Service (MA-PFFS) product.

On a reported basis, Coventry earned $1.29 per share as against the year-ago earnings of 48 cents. The continued emphasis on cost containment throughout the organization in the quarter led to the improved performance.

(Read our full coverage on this earnings report: Coventry Beats, Raises Outlook)

Earnings Estimate Revisions: Overview

Estimates are inclined towards the positive side for both the quarters and fiscal 2010 and 2011. It seems that both the commercial and the Medicare businesses continue to benefit from unusually low medical trends during the quarter. The earnings estimate details are discussed below.

Agreement of Analysts

Over the last 30 days, 13 out of the 16 analysts covering the stock have nudged up their estimates for the fourth quarter of 2010, while none of them have suggested a falling trend. For the first quarter of 2011, 7 of the 9 analysts revised their estimates upward with one of them indicating a downward direction.

For fiscal 2010, all 16 analysts have raised their earnings estimates, owing to revised guidance for 2010. 2011 estimates also witnessed a positive outlook with 14 out of 17 analysts raising their estimates, while 2 analysts moved in the opposite direction.

This was primarily attributable to the health care overhaul legislation passed earlier in March 2010 by Congress, which could still provide some headwinds to financial performance, but Coventry expects the medical loss ratios to ease with this new regulation.

Magnitude of Estimate Revisions

For the fourth quarter, the estimates increased 20 cents over the past 30 days, while the first quarter of 2011 witnessed a rise of 4 cents over the same period. Fiscal 2010 estimates increased by 79 cents, while the estimates rose 16 cents for fiscal 2011, over the past 30 days.

The upward trend shows Coventry’s ability to maintain a strong capital position along with its continuous acquisition strategy, just like its peers such as WellPoint Inc. (WLP) and Molina Healthcare Inc. (MOH). The decelerating estimates trend is expected to come from the impact of health reforms.

Our Recommendation

Currently, we have a Neutral outlook on Coventry in the long run. While we are pleased with the strong results along with solid cost management, we remain concerned about the health reform headwind.

Furthermore, the company has a solid fundamental business and continues to grow with all seven core businesses performing at or above internal expectations. Further, we believe that Coventry is also growing through acquisitions, as it is making continuous efforts to expand its footprint in Missouri and Arkansas.

On October 1, Coventry completed the acquisition of Mercy Health Plans (“MHP”) and its subsidiaries from Sisters of Mercy Health System for an undisclosed amount. Coventry said the acquisition is expected to be slightly accretive to its 2011 earnings and will help serve more than 1.2 million members in its six-state Midwest region.

We believe that Coventry’s acquisitive growth strategy will help it to leverage its regional service centers and improve operating efficiencies, largely through economies of scale.

Disclosure: No position

Happy trading,

Curt