Aetna (AET) Q3 Earnings Set To Beat Estimates: Here's Why

Health insurer Aetna Inc. (NYSE:AET) is scheduled to release third-quarter financial results before the market opens on Oct 27.

In the last reported quarter, the company beat the earnings estimate by 4.74%. Moreover, the company posted a positive earnings surprise in each of the last four quarters, with an average beat of 7.31%. Let’s see how things are shaping up for this announcement.

Why a Likely Positive Surprise?

Our proven model shows that Aetna is likely to beat on earnings as it has the right combination of two key components. Note that a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy) or #2 (Buy) or at least #3 (Hold) to have a significantly higher chance of beating estimates.

Zacks ESP: The Most Accurate estimate for Aetna is $2.05 per share, the Zacks Consensus Estimate of $2.02. So, the Earnings ESP for Aetna is +1.49%. Please check our Earnings ESP Filter that enables you to find stocks that are expected to come out with earnings surprises.

Zacks Rank: Aetna carries a Zacks Rank #3, which increases the predictive power of ESP.

Factors to Drive Q3 Results

We expect Aetna’s third earnings to see an upside from its Government business, which continues to be its key source of growth. Government premiums now represent nearly 50% of the company’s total healthcare premiums and this business continues to outperform.

More specifically, within the government business, the company’s Medicare business is expected to show a superior performance, driven by strong membership growth. The investments made by the company in its value-based care models for Medicare Advantage beneficiaries should drive its financial performance.

We also expect to see a decline in operating expense ratio as a result of the company’s strong commitment to drive productivity improvements and its disciplined focus on managing its operating costs.

Nevertheless earnings will see a bump from ACA small group and individual products continue to be challenged by a deterioration of the risk pool and an ineffective risk adjustment mechanism.

Membership declines in the company’s Commercial Insured products will likely be due to attrition in its individual and small group membership.

We also expect to see favorable prior-year reserve development across all of its core products which should lift its earnings.

However, the bottom line will be hurt by the absence of any share buyback during the third quarter due to the proposed Humana (NYSE:HUM) acquisition.

Other Stocks to Consider

Here are some other companies from the health care sector that you may also consider as our model shows that these too have the right combination of elements to post an earnings beat this quarter:

VCA Inc. (NASDAQ:WOOF) will report third-quarter earnings results on Oct 26. The company has an Earnings ESP of +1.24% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here

Tenet Healthcare Corp. (NYSE:THC) has an Earnings ESP of +26.32% and a Zacks Rank #2. The company is expected to report third-quarter earnings results on Oct 31.

Rigel Pharmaceuticals, Inc. (NASDAQ:RIGL) has an Earnings ESP of +12.5% and a Zacks Rank #3. The company is expected to report third-quarter earnings results on Nov 1.

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