Who’s Buying What

Insurance Resurgence. Shares of health insurers languished after Congress passed President Obama’s historic health care reform bill. But after months in the doldrums, the beleaguered sector got a lift in early March when Thomas Carroll, an analyst with Stifel Nicolaus, upgraded the shares of three managed-care outfits to ‘buy’ from ‘hold.’

Carroll’s research note recommended insurance giants WellPoint (NYSE; WLP) and UnitedHealth (NYSE: UNH). But Coventry Health Care (NYSE: CVH), which operates health plans and insurance companies, caught the most air. After the March 3 upgrade, Coventry’s shares jumped by more than 7 percent and touched a new 52-week high.

Coventry’s fourth-quarter profits rose 38 percent to $150.3 million, or $1.01 per share, as medical costs declined as a percentage of premiums. This topped analyst expectations by 8 cents. The firm forecast 2011 profits of $2.50 to $2.90 per share on revenue of $11.5 billion, below consensus expectations of $2.91 earnings per share and revenue of $12.7 billion.

But Carroll said this conservative outlook understates Coventry’s growth potential and added that earnings were likely to surprise on the upside. His assessment fueled gains for Coventry’s shares.

Carroll isn’t the only one to take a shine to the managed care business. In recent weeks several other analysts have upgraded the sector. The rising fortunes of health insurers indicate that the Street, and the companies themselves, are coming to terms with the effects of health care reform. As clarity increases, expect these companies to grow more confident in their future business.

Surprise! Surprise!

Good Herb. Shares of weight management and nutritional supplement producer Herbalife (NYSE: HLF) jumped more than 13 percent on the back of a strong fourth-quarter earnings report. Herbalife, which boasts a product lineup of meal replacement shakes and appetite suppressors, reported a 17 percent increase in revenue after posting strong sales across all markets. Net income for the quarter rose to $81 million, from 61.7 million the previous year.

Volume sales of weight management products in the emerging markets surged 19 percent while sales in established markets grew by more than 12 percent. Full-year sales grew by 18 percent to a record $2.7 billion, and profits surged 43 percent to $297 million. Cash flow from operations increased 33.4 percent to $380.4 million, and the company reduced its debt by $11.9 million. Herbalife also shelled out $53.7 million in dividends last year.

Herbalife’s performance was driven by a stronger focus on emerging markets. Consumers in developing nations have experienced a rapidly improving standard of living. They’ve also begun their own battle with the bulge. As a result, management issued a strong 2011 guidance of earnings per share between $5.15 and $5.40 on an anticipated 13 to 15 percent growth in net sales.

Robust earnings growth is expected to drive further increases in the company’s dividend payout. The firm’s shares currently yield 1.3 percent. Herbalife boosted its dividend to 25 cents in August, the first increase in three years.

The consensus view is that the company’s dividend policy should grow more generous as the firm continues to expand and mature.

The Checkup

Lookin’ Sharp! In the July 2009 issue’s Worth a Look section, editor Benjamin Shepherd highlighted two retailers that boast conservative balance sheet and strong brand names. Shepherd said these firms would benefit from an uptick in consumer spending.

Of the two firms that Shepherd recommended, home furnishings retailer Bed, Bath & Beyond (NSDQ: BBBY) suffered the most during the economic downturn. But Bed, Bath & Beyond’s shares have had a makeover. A steady stream of customers has helped boost the firm’s stock by more than 64 percent.

The retailer reported strong fourth-quarter growth in both sales and operating profit, on the back of an 11 percent rise in revenue to $2.2 billion. Operating margins rose to 13.9 percent as revenue grew and the company cut back on advertising and corporate expenses.

Shepherd expects those growth trends to continue, particularly as the housing market stabilizes. Management shares this sanguine outlook; the company recently initiated a $2 billion, two-year share buyback program.

Aeropostale (NYSE: ARO) remains a choice destination for cost-conscious teenage fashionistas. But the clothing retailer has failed to replicate the gains of Bed, Bath & Beyond.

Nonetheless, the firm’s shares have gained 18 percent, and the company’s performance has caught the eye of a few prominent private-equity players.  

At the end of December, the retailer announced that it had retained Barclays Capital as a strategic advisor in an attempt to hold other interested private-equity firms at bay.

There’s much to like about Aeropostale. The firm has no net debt on its balance sheet despite its rapid expansion, making it an excellent candidate to leverage up.