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4 HMO Stocks to Watch Despite Escalating Technology Expenses
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The U.S. health insurance industry, commonly referred to as the Health Maintenance Organization, is expected to be driven by the growing membership and several contract wins from state authorities. Despite the industry’s promising prospects, elevated expenses resulting from high technology investments remain a potential headwind. Another issue for HMOs is the acute shortage of nurses that has been troubling the country for quite some time. Despite these challenges, companies like UnitedHealth Group Incorporated (UNH - Free Report) , Humana Inc. (HUM - Free Report) , Centene Corporation (CNC - Free Report) and Molina Healthcare, Inc. (MOH - Free Report) are better placed to counter the industry downsides.
About the Industry
The Zacks HMO industry consists of entities (either private or public) that take care of its subscribers’ basic and supplemental health services. Companies in this space primarily assume risks and assign premiums to health and medical insurance policies. Industry participants also provide administrative and managed-care services for self-funded insurance. Services are generally provided by a network of approved care providers (called in-network), which include primary care physicians, clinical facilities, hospitals and specialists. However, out-of-network exceptions are made during emergencies or when it is medically necessary. Health insurance plans can be availed through private purchase, social insurance or social welfare programs.
4 Trends Defining Future of the HMO Industry
Continuous Technology Advancements: In light of the ongoing trend to go digital, the industry players resorted to heavy technology investments to develop telehealth platforms. These platforms were much in demand as healthcare services could be received within the comforts of one’s home, a trend much in demand amid the health woes induced by the COVID-19 pandemic. Even when the pandemic is about to recede, the usage of telehealth platforms shows no signs of slowing down. Per a Grand View Research report, the global telehealth services market is anticipated to witness a 30.4% CAGR over the 2022-2030 forecast period. Therefore, the HMO players remain under constant pressure to upgrade the technology suite, which eases the delivery of healthcare services and boosts operational efficiencies. However, these investments might escalate costs for health insurers, denting margins in the days ahead.
Nationwide Shortage of Nurses: Shortage of nurses and other medical personnel remains a potential issue that has been grappling most U.S. healthcare providers for quite some time. Since health insurers often depend on medical staff to coordinate quality managed care services with the unique needs of patients through a health plan, the dearth of nurses might pose a serious threat to the seamless functioning of the health insurers. The shortage might also prompt hiring temporary labor, which in turn, can elevate administrative costs for a health insurer. Also, most health insurers these days collaborate with several hospitals, as a result of which health plan members can avail hospital treatments at discounted rates. Therefore, the lack of adequate nurses puts pressure on a hospital’s operation and reduces the efficiency of delivering quality services, which in turn, can indirectly affect the customer base of a health insurer.
Steady Growth in Premiums: A well-performing government business certainly provides a respite to the industry players amid the prevalent challenges. Integral to its government business, health insurers devise solid Medicare and Medicaid plans and extend the same across several U.S. communities. The plans fetch numerous contract wins to the health insurers from state authorities. The health insurers are making constant efforts to upgrade the health plans, expecting to lure more people in availing the plans amid the 2023 Open Enrollment Period commencing Nov 1, 2022. With the expansion in the customer base, premiums are likely to increase, ushering in hope as the metric usually contributes a chunk to any health insurer’s revenues.
An Aging U.S. Population: Demand for Medicare plans, within which people aged 65 or above can enroll, is expected to continue witnessing an uptick on account of a growing aging population in the United States. Per Statista, the leading market and consumer data provider, around 16.9% of the American population was aged 65 years or above in 2020 and the percentage is anticipated to reach 22% by 2050. The industry participants can capitalize on a rapidly aging population through a wide array of Medicare plans or operating senior-focused centers for delivering quality and high-value care to the medically vulnerable population.
Zacks Industry Rank Hints at Bearish Outlook
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all member stocks, indicates tepid near-term prospects. The Zacks Medical-HMOs industry is housed within the broader Zacks Medical sector. It currently carries a Zacks Industry Rank #162, which places it in the bottom 35% of more than 250 Zacks industries.
Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1. The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate.
Despite the dismal scenario, we will present a few stocks that one can buy or retain, given their solid growth endeavors. But before that, it’s worth taking a look at the industry’s recent stock-market performance and the valuation picture.
Industry Outperforms S&P 500 & Sector
The Zacks Medical-HMO industry has outperformed the Zacks S&P 500 composite and its sector in the past year.
In the said time frame, the industry has gained 24.6% against the S&P 500’s 18% decline and the Zacks Medical sector’s decrease of 26.9%.
One-Year Price Performance
Image Source: Zacks Investment Research
Industry's Current Valuation
On the basis of the forward 12-month price-to-earnings (P/E) ratio, which is commonly used for valuing medical stocks, the industry trades at 19.61X compared with the S&P 500’s 15.90X and matches the sector.
Over the past five years, the industry has traded as high as 21.48X and as low as 17.43X, with the median being at 20.18X, as the chart below shows.
Forward 12-Month Price/Earnings (P/E) Ratio
Image Source: Zacks Investment Research
Image Source: Zacks Investment Research
4 Stocks to Keep a Close Eye on
We are presenting one stock from the space, currently carrying a Zacks Rank #2 (Buy) and three stocks carrying a Zacks Rank #3 (Hold). Considering the current industry scenario, it might be prudent for investors to buy or retain these stocks in their portfolio, as these are well-placed to generate growth in the long haul.
UnitedHealth Group: Based in Minnesota, UnitedHealth Group should continue to benefit from solid performances across its UnitedHealthcare and Optum businesses. A growing top line is aiding the healthcare organization in developing an updated and efficient health system. New deals and renewed agreements won by this presently Zacks Rank #3 HMO are the result of its solid Medicare and Medicaid plans. A solid financial position empowers UNH to undertake growth-related initiatives. Shares of UnitedHealth Group have gained 26.8% in a year.
The Zacks Consensus Estimate for UNH’s 2022 EPS indicates a 14.9% increase from the year-ago reported figure. The consensus mark for current-year revenues indicates a 12% improvement from the year-ago actual. UnitedHealth Group delivered an earnings beat in each of the last four quarters, the average being 3.66%.
Price & Consensus: UNH
Image Source: Zacks Investment Research
Humana: Kentucky-based Humana operates as a health and well-being company, aimed at improving the health outcomes of medical and specialty members. With a Zacks Rank of 3 at present, HUM continues to benefit from higher premium revenues from membership growth in its well-performing Medicaid and Medicare businesses. To bring about better whole-person health outcomes, the CenterWell brand was launched by Humana in March 2021 to integrate three of its major payer-agnostic healthcare service offerings, such as primary care, pharmacy and home health, under a single umbrella. The stock has rallied 21.5% in a year.
The Zacks Consensus Estimate for HUM’s 2022 EPS indicates a 21.1% increase from the prior-year reported number. The consensus mark for 2022 earnings has moved up 4% over the past seven days. Humana’s earnings outpaced estimates in each of the last four quarters, the average being 9.09%.
Price & Consensus: HUM
Image Source: Zacks Investment Research
Centene: Based in Missouri, Centene remains a well-known managed healthcare products and services provider, mainly in the form of Medicaid, Medicare and commercial products. Benefits derived from the WellCare acquisition and membership growth should continue to drive CNC’s top line. A well-diversified healthcare suite and a solid nationwide presence fetched numerous contract wins and deal renewals for this currently Zacks #3 Ranked stock. Its shares have gained 23.4% in a year.
The Zacks Consensus Estimate for CNC’s 2022 EPS indicates a 10.7% increase from the year-earlier reading, having moved up 0.9% over the past 60 days. The consensus mark for current-year revenues indicates a 14% improvement from the year-ago actual. The bottom line of Centene outpaced earnings estimates in three of the last four quarters and missed the mark once, the average being 2.99%.
Price & Consensus: CNC
Image Source: Zacks Investment Research
Molina Healthcare: This California-based health insurer continues to benefit from higher premium revenues owing to membership growth in its well-performing Medicare and Medicaid businesses. Prudent expense management programs, undertaken by this currently Zacks Rank #2 player are anticipated to lower its total expenses in the days ahead. Shares of MOH have gained 16.3% in a year.
The Zacks Consensus Estimate for Molina Healthcare’s 2022 EPS indicates a 30.4% increase from the year-ago tally. The consensus mark for 2022 earnings has moved up 2% over the past 60 days. MOH’s earnings outpaced estimates in each of the last four quarters, the average being 3.22%. The expected long-term earnings growth rate is pegged at 16.7%, better than the industry average of 14.9%.
Price & Consensus: MOH
Image Source: Zacks Investment Research
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4 HMO Stocks to Watch Despite Escalating Technology Expenses
The U.S. health insurance industry, commonly referred to as the Health Maintenance Organization, is expected to be driven by the growing membership and several contract wins from state authorities. Despite the industry’s promising prospects, elevated expenses resulting from high technology investments remain a potential headwind. Another issue for HMOs is the acute shortage of nurses that has been troubling the country for quite some time. Despite these challenges, companies like UnitedHealth Group Incorporated (UNH - Free Report) , Humana Inc. (HUM - Free Report) , Centene Corporation (CNC - Free Report) and Molina Healthcare, Inc. (MOH - Free Report) are better placed to counter the industry downsides.
About the Industry
The Zacks HMO industry consists of entities (either private or public) that take care of its subscribers’ basic and supplemental health services. Companies in this space primarily assume risks and assign premiums to health and medical insurance policies. Industry participants also provide administrative and managed-care services for self-funded insurance. Services are generally provided by a network of approved care providers (called in-network), which include primary care physicians, clinical facilities, hospitals and specialists. However, out-of-network exceptions are made during emergencies or when it is medically necessary. Health insurance plans can be availed through private purchase, social insurance or social welfare programs.
4 Trends Defining Future of the HMO Industry
Continuous Technology Advancements: In light of the ongoing trend to go digital, the industry players resorted to heavy technology investments to develop telehealth platforms. These platforms were much in demand as healthcare services could be received within the comforts of one’s home, a trend much in demand amid the health woes induced by the COVID-19 pandemic. Even when the pandemic is about to recede, the usage of telehealth platforms shows no signs of slowing down. Per a Grand View Research report, the global telehealth services market is anticipated to witness a 30.4% CAGR over the 2022-2030 forecast period. Therefore, the HMO players remain under constant pressure to upgrade the technology suite, which eases the delivery of healthcare services and boosts operational efficiencies. However, these investments might escalate costs for health insurers, denting margins in the days ahead.
Nationwide Shortage of Nurses: Shortage of nurses and other medical personnel remains a potential issue that has been grappling most U.S. healthcare providers for quite some time. Since health insurers often depend on medical staff to coordinate quality managed care services with the unique needs of patients through a health plan, the dearth of nurses might pose a serious threat to the seamless functioning of the health insurers. The shortage might also prompt hiring temporary labor, which in turn, can elevate administrative costs for a health insurer. Also, most health insurers these days collaborate with several hospitals, as a result of which health plan members can avail hospital treatments at discounted rates. Therefore, the lack of adequate nurses puts pressure on a hospital’s operation and reduces the efficiency of delivering quality services, which in turn, can indirectly affect the customer base of a health insurer.
Steady Growth in Premiums: A well-performing government business certainly provides a respite to the industry players amid the prevalent challenges. Integral to its government business, health insurers devise solid Medicare and Medicaid plans and extend the same across several U.S. communities. The plans fetch numerous contract wins to the health insurers from state authorities. The health insurers are making constant efforts to upgrade the health plans, expecting to lure more people in availing the plans amid the 2023 Open Enrollment Period commencing Nov 1, 2022. With the expansion in the customer base, premiums are likely to increase, ushering in hope as the metric usually contributes a chunk to any health insurer’s revenues.
An Aging U.S. Population: Demand for Medicare plans, within which people aged 65 or above can enroll, is expected to continue witnessing an uptick on account of a growing aging population in the United States. Per Statista, the leading market and consumer data provider, around 16.9% of the American population was aged 65 years or above in 2020 and the percentage is anticipated to reach 22% by 2050. The industry participants can capitalize on a rapidly aging population through a wide array of Medicare plans or operating senior-focused centers for delivering quality and high-value care to the medically vulnerable population.
Zacks Industry Rank Hints at Bearish Outlook
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all member stocks, indicates tepid near-term prospects. The Zacks Medical-HMOs industry is housed within the broader Zacks Medical sector. It currently carries a Zacks Industry Rank #162, which places it in the bottom 35% of more than 250 Zacks industries.
Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1. The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate.
Despite the dismal scenario, we will present a few stocks that one can buy or retain, given their solid growth endeavors. But before that, it’s worth taking a look at the industry’s recent stock-market performance and the valuation picture.
Industry Outperforms S&P 500 & Sector
The Zacks Medical-HMO industry has outperformed the Zacks S&P 500 composite and its sector in the past year.
In the said time frame, the industry has gained 24.6% against the S&P 500’s 18% decline and the Zacks Medical sector’s decrease of 26.9%.
One-Year Price Performance
Image Source: Zacks Investment Research
Industry's Current Valuation
On the basis of the forward 12-month price-to-earnings (P/E) ratio, which is commonly used for valuing medical stocks, the industry trades at 19.61X compared with the S&P 500’s 15.90X and matches the sector.
Over the past five years, the industry has traded as high as 21.48X and as low as 17.43X, with the median being at 20.18X, as the chart below shows.
Forward 12-Month Price/Earnings (P/E) Ratio
Image Source: Zacks Investment Research
Image Source: Zacks Investment Research
4 Stocks to Keep a Close Eye on
We are presenting one stock from the space, currently carrying a Zacks Rank #2 (Buy) and three stocks carrying a Zacks Rank #3 (Hold). Considering the current industry scenario, it might be prudent for investors to buy or retain these stocks in their portfolio, as these are well-placed to generate growth in the long haul.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
UnitedHealth Group: Based in Minnesota, UnitedHealth Group should continue to benefit from solid performances across its UnitedHealthcare and Optum businesses. A growing top line is aiding the healthcare organization in developing an updated and efficient health system. New deals and renewed agreements won by this presently Zacks Rank #3 HMO are the result of its solid Medicare and Medicaid plans. A solid financial position empowers UNH to undertake growth-related initiatives. Shares of UnitedHealth Group have gained 26.8% in a year.
The Zacks Consensus Estimate for UNH’s 2022 EPS indicates a 14.9% increase from the year-ago reported figure. The consensus mark for current-year revenues indicates a 12% improvement from the year-ago actual. UnitedHealth Group delivered an earnings beat in each of the last four quarters, the average being 3.66%.
Price & Consensus: UNH
Image Source: Zacks Investment Research
Humana: Kentucky-based Humana operates as a health and well-being company, aimed at improving the health outcomes of medical and specialty members. With a Zacks Rank of 3 at present, HUM continues to benefit from higher premium revenues from membership growth in its well-performing Medicaid and Medicare businesses. To bring about better whole-person health outcomes, the CenterWell brand was launched by Humana in March 2021 to integrate three of its major payer-agnostic healthcare service offerings, such as primary care, pharmacy and home health, under a single umbrella. The stock has rallied 21.5% in a year.
The Zacks Consensus Estimate for HUM’s 2022 EPS indicates a 21.1% increase from the prior-year reported number. The consensus mark for 2022 earnings has moved up 4% over the past seven days. Humana’s earnings outpaced estimates in each of the last four quarters, the average being 9.09%.
Price & Consensus: HUM
Image Source: Zacks Investment Research
Centene: Based in Missouri, Centene remains a well-known managed healthcare products and services provider, mainly in the form of Medicaid, Medicare and commercial products. Benefits derived from the WellCare acquisition and membership growth should continue to drive CNC’s top line. A well-diversified healthcare suite and a solid nationwide presence fetched numerous contract wins and deal renewals for this currently Zacks #3 Ranked stock. Its shares have gained 23.4% in a year.
The Zacks Consensus Estimate for CNC’s 2022 EPS indicates a 10.7% increase from the year-earlier reading, having moved up 0.9% over the past 60 days. The consensus mark for current-year revenues indicates a 14% improvement from the year-ago actual. The bottom line of Centene outpaced earnings estimates in three of the last four quarters and missed the mark once, the average being 2.99%.
Price & Consensus: CNC
Image Source: Zacks Investment Research
Molina Healthcare: This California-based health insurer continues to benefit from higher premium revenues owing to membership growth in its well-performing Medicare and Medicaid businesses. Prudent expense management programs, undertaken by this currently Zacks Rank #2 player are anticipated to lower its total expenses in the days ahead. Shares of MOH have gained 16.3% in a year.
The Zacks Consensus Estimate for Molina Healthcare’s 2022 EPS indicates a 30.4% increase from the year-ago tally. The consensus mark for 2022 earnings has moved up 2% over the past 60 days. MOH’s earnings outpaced estimates in each of the last four quarters, the average being 3.22%. The expected long-term earnings growth rate is pegged at 16.7%, better than the industry average of 14.9%.
Price & Consensus: MOH
Image Source: Zacks Investment Research