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4 HMO Stocks in Focus as Players Adapt to Changes in the Industry

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The imminent transition of powers at the presidential office, growing senior population, a consolidation wave, driven by mergers and acquisitions, and investment in technology are expected to drive growth of the HMO players like UnitedHealth Group Inc. (UNH - Free Report) , Anthem Inc. (ANTM - Free Report) , Cigna Corp. (CI - Free Report) and Molina Healthcare, Inc. (MOH - Free Report) .

About the Industry

The  Health Maintenance Organization (HMO) industry comprises entities (either private or public) that take care of the basic and supplemental health services of its subscribers. Companies in this space primarily assume the risks involved 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 of by ways like private purchase, social insurance or social welfare programs, such as the government-funded Medicare and Medicaid.

3 Trends Shaping the Future of the HMO Industry

Handover of Powers at the White House:  President-elect Joe Biden’s win is expected to bring notable changes to the HMO industry. Since the policies of the incumbent President Donald Trump’s administration were different from those of the incoming democratic candidate, we are likely to see some immediate shifts after his assuming  office. While big structural changes will come up gradually, smaller alterations will be put into effect quickly. These might be changes like bolstering the Affordable Care Act, making insurance subsidies more generous, getting coverage for low-income groups across those US states that haven’t expanded Medicaid and neuter the pending Supreme Court lawsuit that labels the entire ACA as unconstitutional. These changes bode well for the players as it will increase the insured population and aid top-line growth.

Growing Senior Population: As life expectancy continues to rise in the United States and seniors account for a higher percentage of the total population, overall demand for health insurance among the aged will soar. The expanding senior population drives demand for Medicare Advantage (MA), the private version of the government Medicare program. The continued decrease in member premiums, new benefits and less attractive medigap options are all contributing to Medicare Advantage growth. Telehealth facilities are also being provided in the MA (Medicare Advantage) plans with the COVID-19 outbreak. With 10,000 boomers aging into the program every day and beneficiaries being offered a larger selection of plans each new season, MA enrollment growth projections will only surge and continue to take on a larger role in the Medicare program over the next decade. Medicare Advantage enrollment estimates by The Congressional Budget Office (CBO) predict a continued improvement over the next decade with Medicare Advantage enrollment plan covering about 47% of the beneficiaries by 2029.

Increased Adoption of Technology:  Digital technology began to reshape the health insurance markets. Players in the United States were slow to embrace digitization and are still behind other industries in their use of AI and automation but the coronavirus pandemic now accelerated this process. Strong digital skills are a must-have for the health insurers. Some payers are already deriving direct benefits from their digital investments,by providing enhanced   customer experience, gaining from administrative and medical cost reductions, better member health outcomes and revenue growth. These payers are also finding ways to gain a plum market share with digital solutions.

Zacks Industry Rank Indicates Dull Prospects

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates gloomy prospects in the near term. The Zacks Medical-HMO, which is a 15-stock group within the broader Zacks Medical sector, currently carries a Zacks Industry Rank #232, which places it in the bottom 8% of 252 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the bottom 8% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate.

Before we present a few HMO stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and its valuation picture.

Industry Outperformed the Sector but Lagged the S&P 500

The Zacks Medical-HMO industry has underperformed the Zacks S&P 500 composite but has fared better than ts own sector over the past year.

We see that the stocks in this industry have collectively rallied 16.1% over the past year compared with the Zacks S&P 500 composite’s rise of 17.5%. Meanwhile, the Zacks Medical sector has gained 6.7%.

One-Year Price Performance

HMO Industry’s Current Valuation

On the basis of the forward 12-month price-to-earnings (P/E) ratio, which is commonly used for valuing HMO stocks, the industry is currently trading at 17.59X compared with the S&P 500’s 23.05X and the sector’s 23.15X.

Over the past five years, the industry has traded as high as 20.58X, as low as 12.48X and at a median of 15.99X.

Price-to-Earnings (P/E) Ratio (F12M)


Price-to-Earnings (P/E) Ratio (F12M)

4 HMO Stocks to Keep Tabs on

Four stocks in the space currently carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.


UnitedHealth Group Inc.:  The company’s top line is bolstered by new deals, renewed agreements and expansion of service offerings. Its numerous acquisitions augur well for its inorganic growth profile. Expansion of the company’s health services segment provides significant diversification benefits. UnitedHealth remains well poised to benefit from its government business, comprising both Medicaid and Medicare Advantage. A solid balance sheet and a consistent cash flow generation not only encourage investments in business but also add shareholder value.

The company delivered an average earnings surprise of 15.22% in the trailing four quarters.  The expected long-term earnings growth rate is pegged at 12.6%.

Price and Consensus: UNH


Anthem Inc.’s prudent acquisitions and collaborations complement its inorganic growth story and help it boost Medicare Advantage growth. Its increasing top line, driven by the premium rate increase and higher membership, paves the way for long-term growth. Its solid guidance impresses. It witnessed a rise in usage of its virtual care services, which in turn, poises Anthem well for long-term growth, courtesy of rising demand for telemedicine in behavioral health amid the COVID-19 pandemic. Its shares have underperformed its industry in a year. Nevertheless, its strong capital position enabled it to undertake shareholder-friendly moves via buybacks and dividend payments.

The company delivered an average earnings surprise of 1.86% in the trailing four quarters.  The expected long-term earnings growth rate is pegged at 14%.

Price and Consensus: ANTM



Cigna Corp.: The company’s acquisition of Express Scripts bodes well for the long haul. It divested its Group Life and Disability insurance business to reduce the debt level and streamline its operations. Its expanding international business provides diversification. Operating profitability achieved by a controlled medical care cost and trimming of other operating costs is steadily aiding the company’s bottom line. Increasing membership is another positive for Cigna. The company’s strong capital position coupled with solid cash generation abilities leads to investment in business.

The company delivered an average earnings surprise of 6.83% in the trailing four quarters.  The expected long-term earnings growth rate is pegged at 11%.

Price and Consensus: CI


Molina Healthcare Inc. is poised for growth on the back of its developmental strategies, an improving top line and margin recovery. It began an enterprise-wide restructuring program for an organizational rejig to augment its operational efficiency. The buyout of Magellan Health is anticipated to not only add to its capabilities but also enrich its geographic diversity. Its solid 2020 guidance should instill investors' confidence in the stock. It also flaunts a sturdy capital position on balance sheet strength.

The company delivered an average earnings surprise of 14.8% in the trailing four quarters.  The expected long-term earnings growth rate is pegged at 10%.

Price and Consensus: MOH

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