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 for 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 in emergencies or when medically necessary. Health insurance plans can be availed by ways such as private purchase, social insurance or social welfare programs such as Medicare and Medicaid, funded by the government.
Let us take a look at the industry’s three major themes:
• As life expectancy continues to increase in the United States and seniors account for a higher percentage of the total U.S. population, overall demand for health insurance for seniors will increase. According to the 2018 U.S. Census, between 2010 and 2030, the number of individuals aged 65+ is projected to nearly double from 39 million to 73 million, a growth rate nearly 5 times faster than the 17% increase expected for the total population. The census estimates this group to grow from 13% to 21% by 2030 — one of the fastest growing within U.S. population. This senior population has fueled demand for Medicare Advantage (MA), the private version of the government Medicare program. MA plans have proven beneficial for all concerned groups, customers, government and health insurers. Customers gains from better coverage and services, and government on the other hand gains from reduction in cost of care. These plans have also led to considerable revenue growth for the likes of UnitedHealth Group Inc. (UNH - Free Report) , Humana Inc. (HUM) and Anthem Inc. (ANTM - Free Report) among other health insurers.
• The HMO industry is rapidly consolidating with mergers and acquisitions. The most common takeovers in recent years have been in the nature of horizontal expansion in the areas of Medicare and Medicaid as the players seek to garner a greater share of the attractive MA market. Lately, however, the companies have shown interest in expanding vertically and add capabilities to its supply chain through mergers and acquisitions. The mega mergers of Aetna with CVS Health Corp. (CVS - Free Report) and Cigna Corp. (CI - Free Report) with Express Scripts are the best examples of inter industry deals that led to the union of a health insurer and a pharmacy benefit manager.
• The industry has also witnessed development in ancillary business to diversify revenue sources in the wake of tough regulations laid (via the ACA) on health insurance business. These businesses, mostly in the form of health care services, are growing rapidly, opening up new avenues of growth and forming an increased proportion of the industry’s total revenues. Health services business is an important growth area for HMOs as these provide unregulated cash flows and enable players to become comprehensive healthcare providers. Ample opportunities of growth exist in the health service business and continued investments are being made in this area. A poster child for the same is UnitedHealth’s Optum, which provides a range of healthcare-related services.
Zacks Industry Rank Indicates Bright Prospects
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates upbeat prospects in the near term. The Zacks Medical-HMO, which is an 11-stock group within the broader Zacks Medical sector, currently carries a Zacks Industry Rank #25, which places it at the top 10% of 255 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 positive earnings outlook for the constituent companies in aggregate. In a year’s time, the industry’s earnings estimate for the current year has gone up by 4.6%.
One-Year Price Performance
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 valuation picture.
Industry Return Underperformed S&P 500 and its Sector
The Zacks Medical-HMO industry has underperformed both the Zacks S&P 500 composite and its own sector over the past year.
We see that the stocks in this industry have collectively lost 5.7% over the past year, while the Zacks S&P 500 composite and Zacks Medical Sector have rallied 1.8% and 11.4%, respectively.
HMO Industry’s Current Valuation
On the basis of forward 12-month price-to-earnings (P/E) ratio, which is commonly used for valuing HMO stocks, the industry is currently trading at 14.53X compared with the S&P 500’s 16.39X and the sector’s 19.32X.
Over the past five years, the industry has traded as high as 20.53X, as low as 14.27X and at a median of 16.21X.
Price-to-Earnings (P/E) Ratio (F12M)
Price-to-Earnings (P/E) Ratio (F12M)
Despite earnings outperformance by the companies, the industry has underperformed in a year’s time due to various regulatory issues and the uncertainty in policy changes if new a president gets elected. These may have kept investors away from the industry.
Shrugging aside the intermittent political disruptions, players in the industry will continue to ride on technological investment and upgrade, application of blockchain technology, growth of new business units, international expansion, better claims handling, medical cost management, mergers and acquisitions, and a healthy balance sheet.
HMO Stocks to Buy Now
Four stocks in the Zacks Medical-HMO space currently carry a Zacks Rank #2 (Buy).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Joint Corp. (JYNT - Free Report) : The stock has surpassed earnings estimates in two of the last four quarters with an average positive surprise of 190%.
Price and Consensus: JYNT
Anthem Inc. (ANTM - Free Report) : The stock has surpassed earnings estimates in each of the trailing four quarters with an average positive surprise of 4.57%. The Zacks Consensus Estimate for this Minnetonka, MI-based company’s 2019 earnings has gone up 0.3% over the past 30 days.
Price and Consensus: ANTM
Centene Corp. (CNC - Free Report) : The Zacks Consensus Estimate for 2019 bottom line of this Louisville, KY-based company has been raised 0.7% over the past 30 days. The stock has surpassed earnings estimates in each of the last four quarters with an average positive surprise of 4.56%.
Price and Consensus: CNC
UnitedHealth Group, Inc. (UNH - Free Report) : The Zacks Consensus Estimate for this Minnetonka, MI-based company’s 2019 earnings has gone up 0.6% over the past 30 days. The stock has surpassed earnings estimates in each of the trailing four quarters with an average positive surprise of 3.37%.
Price and Consensus: UNH