Successful Investing: Aetna working had in tough environment

Q:My shares of Aetna Inc. have been disappointing. Please shed some light on prospects. -- T.B., via the Internet

Answer: Health care continues to be a demanding business, even for a company that has worked hard to greatly improve its financial fortunes. During the past decade, the firm has unloaded unprofitable and noncore businesses while improving its profit margins.

Yet the third-largest U.S. health insurer, with 19 million medical members, still faces tough competition from industry leaders WellPoint and UnitedHealth. Each has more than 30 million members and enjoys superior economies of scale.

Pricing competition and the financial implications of health-care reform in Washington present the weightiest considerations for the company in its challenging field.

Shares of Aetna (AET) are down 9 percent this year following last year's 51 percent decline.

Aetna's other lines include dental coverage and group life and disability insurance. It is looking to sell its pharmacy benefits management business.

The company recently bought employee assistance program provider Horizon Behavioral Sciences LLC from Psychiatric Solutions Inc. for $70 million in cash. It also joined with pet insurance provider Pets Best Insurance Services to provide discounted rates on pet insurance plans to businesses and chambers of commerce in Connecticut and western Massachusetts.

Ronald Williams became Aetna chairman and CEO in 2006, coming from WellPoint Health Networks. With the likelihood of further consolidation in the health-care industry, Aetna is considered a company that could be a target or could acquire another company.

Because much of the potential downside is already factored into the stock price, the consensus analyst rating of Aetna stock from Wall Street analysts is "buy," according to Thomson Reuters, consisting of seven "strong buys," four "buys," seven "holds" and one "underperform."

Aetna earnings are expected to decline 27 percent this year versus the 8 percent growth rate predicted for the health-care plan industry.

Next year's projected 12 percent rise compares to 10 percent expected for its peers. The five-year annualized return forecast is 13 percent, which is 1 percent lower than the industrywide projection.

Send questions to Andrew Leckey, 555 N. Central Ave., Suite 302, Phoenix, AZ 85004-1248 or .