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3 HMO Stocks to Consider as Aetna (AET) Falls Out of Favor
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Health insurer Aetna Inc. has been grappling with a number of issues of late, which are clearly reflected in its share price underperformance relative to the sector.
Year to date, the stock has gained 15.1% compared with the Zacks categorized Medical Health Maintenance Organization (HMO) industry’s increase of 21.9%. The underperformance indicates the problems faced by the stock, such as policy, regulatory uncertainty, weak exchange business, and legal tussle over merger with Humana Inc. (HUM - Free Report) to name a few.
The company also witnessed a decline in earnings estimates over the last 60 days.
The company’s merger with Humana has once again been deferred, which is likely to have resulted in the stock losing favor with investors. The merger, which would have positioned Aetna as a major Medicare provider – a market coveted by all other players in the industry – is now shrouded in uncertainty. The deal was sued by the DoJ and though the trial was wrapped up last week, no final decision could be reached. The judge is expected to take a decision in mid-January after lawyers from both sides present their arguments.
Aetna has also been voicing its concerns over the public exchange business. In August it pulled out of exchanges in 11 states, including the areas covered by the Justice Department lawsuit .The company came under fire for this move.
The Justice Department alleged that this move of Aetna was litigation-driven and not just for the sake of business growth. Although the company pointed out the mounting losses incurred by the particular business and claimed that the pullback was for reasons associated with business and not litigation, the DoJ did not seem saitisfied.
Aetna’s bottom line will also suffer from the suspension of share buyback to lower debt levels to below 40% within 24 months. The company’s debt-to-consolidated capitalization ratio shot up to 53% as of Sep 30, 2016 from 32.6% on Dec 31, 2015, due to the issuance of $13 billion of senior notes to partially fund the acquisition of Humana.
Aetna is also witnessing hurdles in growing its membership. The company is experiencing continued membership pressure in the middle market and small group businesses due to its previous pricing actions to improve margins. The company now expects losses in its commercial membership to more than offset growth in government membership over the remainder of 2016. The year 2015 saw medical membership decline by 61,000. The company projects membership at around 23 million in 2016 as against 23.49 million members in 2015. This is because growth in Government membership over the remainder of the year is likely to be largely offset by declines in Commercial Insured membership, including continued attrition within its individual products.
Aetna currently carries a Zacks Rank #4 (Sell). Nonetheless, investors may consider some better-ranked players from this space, such as Magellan Health Inc. , WellCare Health Plans, Inc. , United Health Group Inc. (UNH - Free Report) .
Magellan Health boasts strong fundamentals, carries a VGM score of B and has witnessed a rise in earnings estimates over the past 60 days. Also, its PEG ratio of 1.15 is lower than the industry PEG ratio of 1.27. The company’s share price performance is impressive. The stock has gained 22.5% year to date, significantly outperforming the Zacks categorized HMO industry’s increase of 21.9%. The company has seen revenue growth from its acquisition Armed Forces Services Corporation , and The Management Group, LLC . The company also revised its guidance for full-year 2016 to reflect the improved performance of MCC of Florida, favorable claims development and the impact of lower estimated depreciation and amortization expenses. The company flaunts a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
WellCare Health Plans sports a Zacks Rank #1. It carries a VGM score of A and has witnessed a rise in earnings estimates over the past 60 days. The company’s shares have appreciated 75.3% year to date, significantly outperforming the Zacks categorized HMO industry’s gain of 21.9%. Strong growth in the bottom line and top line, along with stellar premium and investment income, led to the outperformance. Moreover, a robust liquidity position backed by strong cash flow generation has helped the company invest in strategic initiatives, which in turn, has accelerated growth. Recently, the company provided a robust guidance for 2017, which indicated top-line growth from organic initiatives and Care1st Arizona acquisition. Alongside, it reaffirmed full-year 2016 guidance.
UnitedHealth has a Zacks Rank #2 (Buy) and a VGM score of A. It witnessed a rise in earnings estimates over the past 90 days. The company saw its share price increase 36.9% year to date, significantly outperforming the Zacks categorized HMO industry’s rise of 21.9%. It is the most diversified health maintenance organization. Though the company’s public exchange business has been a drag and it has exited most of the markets, its stock remains an attractive pick given the strength in its other business segments. Instead of its heavily regulated Health Benefits business, the company is now focusing on investing and growing its Health Services business branded as Optum.
To this end, the company acquired Catamaran last year. The acquisition has evidently been fruitful, courtesy of the revenue accretion from it. Optum is becoming an increasingly valuable business and is expected to contribute more than 40% of UnitedHealth Group’s consolidated operating earnings outlook this year.
Also, the company has grown membership over the past five years to nearly 13.5 million or by 40% The company’s membership is set to grow further in Medicare Advantage, Medicaid as well as commercial plans. UnitedHealth also has a strong balance sheet and generates handsome cash flows, which allow it to increase dividend payments and make regular share buybacks.
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3 HMO Stocks to Consider as Aetna (AET) Falls Out of Favor
Health insurer Aetna Inc. has been grappling with a number of issues of late, which are clearly reflected in its share price underperformance relative to the sector.
Year to date, the stock has gained 15.1% compared with the Zacks categorized Medical Health Maintenance Organization (HMO) industry’s increase of 21.9%. The underperformance indicates the problems faced by the stock, such as policy, regulatory uncertainty, weak exchange business, and legal tussle over merger with Humana Inc. (HUM - Free Report) to name a few.
The company also witnessed a decline in earnings estimates over the last 60 days.
The company’s merger with Humana has once again been deferred, which is likely to have resulted in the stock losing favor with investors. The merger, which would have positioned Aetna as a major Medicare provider – a market coveted by all other players in the industry – is now shrouded in uncertainty. The deal was sued by the DoJ and though the trial was wrapped up last week, no final decision could be reached. The judge is expected to take a decision in mid-January after lawyers from both sides present their arguments.
Aetna has also been voicing its concerns over the public exchange business. In August it pulled out of exchanges in 11 states, including the areas covered by the Justice Department lawsuit .The company came under fire for this move.
The Justice Department alleged that this move of Aetna was litigation-driven and not just for the sake of business growth. Although the company pointed out the mounting losses incurred by the particular business and claimed that the pullback was for reasons associated with business and not litigation, the DoJ did not seem saitisfied.
Aetna’s bottom line will also suffer from the suspension of share buyback to lower debt levels to below 40% within 24 months. The company’s debt-to-consolidated capitalization ratio shot up to 53% as of Sep 30, 2016 from 32.6% on Dec 31, 2015, due to the issuance of $13 billion of senior notes to partially fund the acquisition of Humana.
Aetna is also witnessing hurdles in growing its membership. The company is experiencing continued membership pressure in the middle market and small group businesses due to its previous pricing actions to improve margins. The company now expects losses in its commercial membership to more than offset growth in government membership over the remainder of 2016. The year 2015 saw medical membership decline by 61,000. The company projects membership at around 23 million in 2016 as against 23.49 million members in 2015. This is because growth in Government membership over the remainder of the year is likely to be largely offset by declines in Commercial Insured membership, including continued attrition within its individual products.
Aetna currently carries a Zacks Rank #4 (Sell). Nonetheless, investors may consider some better-ranked players from this space, such as Magellan Health Inc. , WellCare Health Plans, Inc. , United Health Group Inc. (UNH - Free Report) .
Magellan Health boasts strong fundamentals, carries a VGM score of B and has witnessed a rise in earnings estimates over the past 60 days. Also, its PEG ratio of 1.15 is lower than the industry PEG ratio of 1.27. The company’s share price performance is impressive. The stock has gained 22.5% year to date, significantly outperforming the Zacks categorized HMO industry’s increase of 21.9%. The company has seen revenue growth from its acquisition Armed Forces Services Corporation , and The Management Group, LLC . The company also revised its guidance for full-year 2016 to reflect the improved performance of MCC of Florida, favorable claims development and the impact of lower estimated depreciation and amortization expenses. The company flaunts a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
WellCare Health Plans sports a Zacks Rank #1. It carries a VGM score of A and has witnessed a rise in earnings estimates over the past 60 days. The company’s shares have appreciated 75.3% year to date, significantly outperforming the Zacks categorized HMO industry’s gain of 21.9%. Strong growth in the bottom line and top line, along with stellar premium and investment income, led to the outperformance. Moreover, a robust liquidity position backed by strong cash flow generation has helped the company invest in strategic initiatives, which in turn, has accelerated growth. Recently, the company provided a robust guidance for 2017, which indicated top-line growth from organic initiatives and Care1st Arizona acquisition. Alongside, it reaffirmed full-year 2016 guidance.
UnitedHealth has a Zacks Rank #2 (Buy) and a VGM score of A. It witnessed a rise in earnings estimates over the past 90 days. The company saw its share price increase 36.9% year to date, significantly outperforming the Zacks categorized HMO industry’s rise of 21.9%. It is the most diversified health maintenance organization. Though the company’s public exchange business has been a drag and it has exited most of the markets, its stock remains an attractive pick given the strength in its other business segments. Instead of its heavily regulated Health Benefits business, the company is now focusing on investing and growing its Health Services business branded as Optum.
To this end, the company acquired Catamaran last year. The acquisition has evidently been fruitful, courtesy of the revenue accretion from it. Optum is becoming an increasingly valuable business and is expected to contribute more than 40% of UnitedHealth Group’s consolidated operating earnings outlook this year.
Also, the company has grown membership over the past five years to nearly 13.5 million or by 40% The company’s membership is set to grow further in Medicare Advantage, Medicaid as well as commercial plans. UnitedHealth also has a strong balance sheet and generates handsome cash flows, which allow it to increase dividend payments and make regular share buybacks.
Now See Our Private Investment Ideas
While the above ideas are being shared with the public, other trades are hidden from everyone but selected members. Would you like to peek behind the curtain and view them? Starting today, for the next month, you can follow all Zacks' private buys and sells in real time from value to momentum . . . from stocks under $10 to ETF and option moves . . . from insider trades to companies that are about to report positive earnings surprises (we've called them with 80%+ accuracy). You can even look inside portfolios so exclusive that they are normally closed to new investors. Click here for Zacks' secret trades >>