Back to top

Image: Bigstock

5 HMO Stocks Set to Gain From Membership Growth, M&A Strategy

Read MoreHide Full Article

The Zacks Medical-HMO industry is expected to continue benefiting from the well-performing Government business, driven by contract wins and growing membership. The health insurance industry in the United States is more commonly referred to as the HMO space. An aging U.S. population and continuous pursuit of a M&A strategy are likely to provide a boost to the performances of UnitedHealth Group Incorporated (UNH - Free Report) , Anthem, Inc. , Humana Inc. (HUM - Free Report) , Centene Corporation (CNC - Free Report) and Select Medical Holdings Corporation (SEM - Free Report) .

About the Industry

The Zacks Health Maintenance Organization (HMO) industry consists of 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.

4 Trends Shaping the HMO Industry's Future

Continued Membership Growth: Industry players can continue to devise affordable health insurance plans and extend them across several U.S. communities on the back of sound Medicare and Medicaid plans. Forming part of the Government business, these enhanced plans continue to fetch several contract wins from state authorities and result in growing membership. An uptick in membership fetches increased premiums, which sounds well as premiums remain one of the most significant contributors to revenues of any health insurer.

An Aging U.S. Population: The Medicare plans, which are primarily intended for people aged 65 or above, might continue to remain in solid demand driven by a rising aging population in the United States. According to the Administration for Community Living (ACL), one of the operating branches of the U.S. Department of Health and Human Services (HHS), the number of people aged 65 and older has grown more than 17-fold since 1900. The count of the same age group is projected to surge from 54.1 million in 2019 to 80.8 million within 2040 and 94.7 million by the next two decades (per the ACL). The industry participants can capitalize on a rapidly aging population through their a wide array of Medicare plans or upgraded healthcare services.

Pursuit of M&A Strategy: The HMO industry continues to witness a solid merger and acquisition (M&A) strategy that intends to expand capabilities, bolster global presence and boost the customer base of the industry players. The primary aim behind these deals is to enhance the quality of care and bring about diversification benefits, which are crucial to strengthening one’s market position. M&A bankers at Morgan Stanley remain optimistic about 2022 being a solid year with respect to M&A deals. Their positive assumption is based on the fact that all the elements that led to record deal-making activity last year continue to persist in 2022 as well.

Technological Advancements: The industry has been gradually embracing the ongoing trend to go digital and undertaking significant investments for developing virtual healthcare solutions. The use of chatbots and AI-based voice, assistants, augmented reality (AR), virtual reality (VR) and mixed reality (MR), mobile-based apps, robots, cloud computing, and analytics, among other technologies, have been easing the delivery of healthcare services, boosting operational efficiencies and reducing unnecessary expenses. Though the investments might result in escalating costs for health insurers, the virtual services continue to fetch regular revenues and drive their margins in the long term.

Zacks Industry Rank Instills Optimism

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all-member stocks, indicates bright near-term prospects. The Zacks Medical-HMOs industry, which is housed within the broader Zacks Medical sector, currently carries a Zacks Industry Rank #79, which places it at the top 31% of more than 250 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 top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are upbeat about this group’s earnings growth potential. The industry’s earnings estimates for 2022 have increased 5.2% from the past year. Given the bright near-term prospects, companies in the space are expected to gain heavily.

Before we present a few stocks that you may want to buy or retain in your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Outperforms S&P 500 & Sector

The Zacks Medical-HMO industry has outperformed not only the Zacks S&P 500 composite but also its sector as well in the past year.

In the said time frame, the industry has gained 18% against the S&P 500’s 2.9% decline. The Zacks Medical sector has slumped 19.7% in the same time frame.

One-Year Price Performance


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 19.23X compared with the S&P 500’s 17.73X and the sector’s 20.23X.

Over the past five years, the industry has traded as high as 20.64X and as low as 12.5X, with the median being at 17.27X, as the chart below shows.

P/E Ratio (Past 5 Years)

P/E Ratio (Past 5 Years)


5 HMO Stocks to Watch Out for

We are presenting two stocks from the space currently carrying a Zacks Rank #2 (Buy) and three stocks carrying a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

UnitedHealth Group: The Minnesota-based UnitedHealth Group operates as a health care and well-being company. This Zacks Rank #2 HMO should continue to gain on the back of solid contributions from its UnitedHealthcare and Optum businesses. Well-performing Medicare and Medicaid businesses are expected to drive UNH’s performance in the days ahead.

The Zacks Consensus Estimate for UnitedHealth Group’s 2022 EPS indicates a 14.4% increase year over year, having moved up 0.4% over the past 60 days. UNH delivered an earnings beat in each of the last four reported quarters, the average surprise being 3.73%. The expected long-term earnings growth rate is pegged at 14.8%, better than the industry average of 14.5%.

Price & Consensus: UNH

Select Medical: The Pennsylvania-based Select Medical remains one of the largest U.S. operators of critical illness recovery hospitals, rehabilitation hospitals, outpatient rehabilitation clinics and occupational health centers. The company, carrying a Zacks Rank #2, should continue to benefit from consistent top-line growth, driven by solid segmental contributions. Constant efforts to bolster its network of rehabilitation hospitals through either strategic buyouts or joint ventures with well-established healthcare systems are expected to buoy the healthcare provider’s performance in the days ahead.

The Zacks Consensus Estimate for Select Medical’s 2022 earnings has moved up 1.4% over the past 30 days. SEM boasts of an impressive Value Score of A. The expected long-term earnings growth rate is pegged at 15%, better than the industry average.

Price & Consensus: SEM

Anthem: Based in Indiana, Anthem remains one of the largest health benefits companies across the United States in terms of medical membership. ANTM carries a Zacks Rank #3. Premium rate increase and higher membership resulting in solid top-line growth, coupled with steadily undertaking acquisitions and collaborations, should benefit Anthem’s results

The Zacks Consensus Estimate for Anthem’s 2022 EPS indicates a 9.7% increase year over year, having moved up 0.1% over the past 30 days. The bottom line of ANTM outpaced earnings estimates in each of the last four reported quarters, the average surprise being 6.01%. The healthcare provider boasts of an impressive VGM Score of A.


Price & Consensus: ANTM

Humana: The Kentucky-based health and well-being company remains committed to catering to millions of medical and specialty members. The Zacks Rank #3 healthcare provider should benefit from a solid Medicaid business line on the back of several contract wins and growing membership. The pursuit of acquisitions might contribute to the long-term growth of HUM.

The Zacks Consensus Estimate for Humana’s 2022 EPS indicates a 19.4% increase year over year, having moved up 0.4% over the past 30 days. HUM beat earnings estimates in each of the trailing four quarters, the average surprise being 5.94%.

Price & Consensus: HUM

Centene: Based in Missouri, Centene operates as a leading multi-national healthcare enterprise. CNC carries a Zacks Rank #3. The trend of growing revenues stemming from solid Medicare and Medicaid businesses, several contract wins and expansion across different regions should continue in the days ahead.

The Zacks Consensus Estimate for Centene’s 2022 EPS indicates a 6.6% increase year over year. The consensus mark for 2022 earnings has moved up 0.5% over the past 30 days. CNC boasts of an impressive VGM Score of A. The expected long-term earnings growth rate is pegged at 14.2%.

Price & Consensus: CNC