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HUM or CNC: Which Stock is Better-Positioned at the Moment?
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The health insurance industry in the United States, more commonly referred to as the Health Maintenance Organization (HMO) space, continues to benefit on the back of a couple of factors — a well-performing Government business being a vital one. Other factors contributing to the upside include an aging U.S. population, active pursuit of a merger and acquisition (M&A) strategy and a solid financial position that enables them to undertake continued technology investments.
Through the Government business, the health insurers devise cost-effective Medicare, Medicaid as well as Marketplace plans and extend them across several U.S. communities. These plans, backed with some advanced features in the form of varied copays and deductibles, have paved the way for numerous contract wins from state authorities, which in turn bolsters the customer base of the health insurers. Growing membership fetches increased premiums, which bodes well as premiums remain one of the most significant contributors to revenues of any health insurer.
Solid demand for Medicare plans, which are primarily meant to serve people aged 65 or above, is expected to continue in the days ahead owing to a rapidly rising aging U.S. population. Hence, health insurers can capitalize on increasingly serving the aging population via a wide array of Medicare plans. Per the leading market and consumer data provider Statista, 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.
A potent M&A strategy is likely to remain active in the HMO industry as the health insurers intend to boost capabilities, bring diversification benefits, widen customer base and strengthen their global presence through these growth initiatives. The industry has been undertaking significant investments to keep pace with the trend of digitization being infused across every sphere of life. Consequently, the industry players have been devising virtual healthcare solutions, which in turn, ease delivery of healthcare services and boost operational efficiencies. The investments might result in escalating costs for health insurers, but the virtual services continue to fetch a steady revenue base and will drive margins in the long term.
M&A bankers at Morgan Stanley remain positive about 2022 emerging as a solid year with respect to M&A deals. The capability to pursue an active M&A strategy or technology investments highlights the solid financial position in the form of adequate cash reserves or cash generation abilities possessed by the HMO industry players.
The prevailing scenario makes us optimistic regarding consistent growth in the HMO industry, which should bolster the prospects of companies with sound business fundamentals.
The Zacks Medical-HMO industry, which is housed within the broader Zacks Medical sector, has gained 19.9% in the past year against the sector’s decline of 16.9%. The S&P Index lost 10.9% in the same time frame.
Let's delve deeper into specific parameters to ascertain which company is better positioned at the moment.
Price Performance
Shares of Humana gained 5.8% in a year compared with the industry’s rally of 19.9%. Meanwhile, Centene stock rose 17% in the same time frame. Evidently, CNC has the edge over HUM here.
Image Source: Zacks Investment Research
Earnings Surprise History
A stock’s earnings surprise track helps investors get an idea about its performance in the previous quarters.
Humana’s bottom line beat estimates in each of the trailing four quarters, the average surprise being 5.94%. Meanwhile, Centene’s earnings surpassed the mark in two of the trailing four quarters and missed twice, the negative average surprise being 0.42%. It is clear that HUM has a better reading than CNC here.
ROE
Return on equity (ROE) is a profitability measure that indicates how efficiently the company is utilizing its shareholders' funds.
Image Source: Zacks Investment Research
Humana’s ROE of 17.3% exceeds Centene’s ROE of 11.8%. However, both the stocks have a ROE below the industry average of 22.3%.
Valuation
The price-to-earnings value is the best multiple used for valuing healthcare stocks. Compared with Humana’s forward 12-month P/E ratio of 18.54, Centene is cheaper, with a reading of 14.61. The HMO industry’s forward 12-month P/E ratio is 20.35.
Image Source: Zacks Investment Research
Debt-to-Equity
The lower the debt-to-equity ratio, the better it is for the company as it implies a sound solvency level. CNC’s leverage ratio of 69.3X betters HUM’s ratio of 84.6X, but the metric for both stocks remains higher than the industry average of 57.6X. Therefore, Centene holds an edge over Humana on this front.
Image Source: Zacks Investment Research
Robust 2022 Prospect
The Zacks Consensus Estimate for HUM’s 2022 earnings indicates a year-over-year improvement of 19.4%, while the same for CNC suggests 9.5% year-over-year growth this year. Evidently, Humana has the edge over Centene here.
Dividend History
Humana has been a regular dividend-paying company, and its dividend yield stands at 0.7%. Meanwhile, Centene does not resort to dividend payments. This round belongs to HUM.
Membership Growth
Rising membership usually boosts the significant top-line contributor of an HMO company – premiums. HUM should be concerned on this front, since the health insurer had to trim its 2022 Medicare membership growth guidance by roughly 50%. Meanwhile, CNC is witnessing impressive growth in its Medicare business and expects to sustain the trend in the days ahead.
Premium Revenues
Undoubtedly, one of the major metrics that boost a health insurer’s revenues is its premiums. Premiums reported by Humana came in at $22.7 billion in the first quarter of 2022, while the metric for Centene totaled $31.9 billion in the same time frame. Thus, CNC wins this round.
Conclusion
Our comparative analysis shows that Humana is better-placed than Centene with respect to the earnings surprise history, ROE, robust 2022 prospect and dividend history. Meanwhile, CNC scores higher in terms of price performance, valuation, leverage ratio, premium revenues and membership growth. With the scale tilted slightly toward Centene, the stock appears to be better poised.
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HUM or CNC: Which Stock is Better-Positioned at the Moment?
The health insurance industry in the United States, more commonly referred to as the Health Maintenance Organization (HMO) space, continues to benefit on the back of a couple of factors — a well-performing Government business being a vital one. Other factors contributing to the upside include an aging U.S. population, active pursuit of a merger and acquisition (M&A) strategy and a solid financial position that enables them to undertake continued technology investments.
Through the Government business, the health insurers devise cost-effective Medicare, Medicaid as well as Marketplace plans and extend them across several U.S. communities. These plans, backed with some advanced features in the form of varied copays and deductibles, have paved the way for numerous contract wins from state authorities, which in turn bolsters the customer base of the health insurers. Growing membership fetches increased premiums, which bodes well as premiums remain one of the most significant contributors to revenues of any health insurer.
Solid demand for Medicare plans, which are primarily meant to serve people aged 65 or above, is expected to continue in the days ahead owing to a rapidly rising aging U.S. population. Hence, health insurers can capitalize on increasingly serving the aging population via a wide array of Medicare plans. Per the leading market and consumer data provider Statista, 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.
A potent M&A strategy is likely to remain active in the HMO industry as the health insurers intend to boost capabilities, bring diversification benefits, widen customer base and strengthen their global presence through these growth initiatives. The industry has been undertaking significant investments to keep pace with the trend of digitization being infused across every sphere of life. Consequently, the industry players have been devising virtual healthcare solutions, which in turn, ease delivery of healthcare services and boost operational efficiencies. The investments might result in escalating costs for health insurers, but the virtual services continue to fetch a steady revenue base and will drive margins in the long term.
M&A bankers at Morgan Stanley remain positive about 2022 emerging as a solid year with respect to M&A deals. The capability to pursue an active M&A strategy or technology investments highlights the solid financial position in the form of adequate cash reserves or cash generation abilities possessed by the HMO industry players.
The prevailing scenario makes us optimistic regarding consistent growth in the HMO industry, which should bolster the prospects of companies with sound business fundamentals.
The Zacks Medical-HMO industry, which is housed within the broader Zacks Medical sector, has gained 19.9% in the past year against the sector’s decline of 16.9%. The S&P Index lost 10.9% in the same time frame.
Image Source: Zacks Investment Research
Against this backdrop, let’s take a look at the two HMO industry stocks Humana Inc. (HUM - Free Report) and Centene Corporation (CNC - Free Report) , with market capitalizations of $61.2 billion and $51 billion, respectively. Both stocks carry a Zacks Rank #3 (Hold) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Let's delve deeper into specific parameters to ascertain which company is better positioned at the moment.
Price Performance
Shares of Humana gained 5.8% in a year compared with the industry’s rally of 19.9%. Meanwhile, Centene stock rose 17% in the same time frame. Evidently, CNC has the edge over HUM here.
Image Source: Zacks Investment Research
Earnings Surprise History
A stock’s earnings surprise track helps investors get an idea about its performance in the previous quarters.
Humana’s bottom line beat estimates in each of the trailing four quarters, the average surprise being 5.94%. Meanwhile, Centene’s earnings surpassed the mark in two of the trailing four quarters and missed twice, the negative average surprise being 0.42%. It is clear that HUM has a better reading than CNC here.
ROE
Return on equity (ROE) is a profitability measure that indicates how efficiently the company is utilizing its shareholders' funds.
Image Source: Zacks Investment Research
Humana’s ROE of 17.3% exceeds Centene’s ROE of 11.8%. However, both the stocks have a ROE below the industry average of 22.3%.
Valuation
The price-to-earnings value is the best multiple used for valuing healthcare stocks. Compared with Humana’s forward 12-month P/E ratio of 18.54, Centene is cheaper, with a reading of 14.61. The HMO industry’s forward 12-month P/E ratio is 20.35.
Image Source: Zacks Investment Research
Debt-to-Equity
The lower the debt-to-equity ratio, the better it is for the company as it implies a sound solvency level. CNC’s leverage ratio of 69.3X betters HUM’s ratio of 84.6X, but the metric for both stocks remains higher than the industry average of 57.6X. Therefore, Centene holds an edge over Humana on this front.
Image Source: Zacks Investment Research
Robust 2022 Prospect
The Zacks Consensus Estimate for HUM’s 2022 earnings indicates a year-over-year improvement of 19.4%, while the same for CNC suggests 9.5% year-over-year growth this year. Evidently, Humana has the edge over Centene here.
Dividend History
Humana has been a regular dividend-paying company, and its dividend yield stands at 0.7%. Meanwhile, Centene does not resort to dividend payments. This round belongs to HUM.
Membership Growth
Rising membership usually boosts the significant top-line contributor of an HMO company – premiums. HUM should be concerned on this front, since the health insurer had to trim its 2022 Medicare membership growth guidance by roughly 50%. Meanwhile, CNC is witnessing impressive growth in its Medicare business and expects to sustain the trend in the days ahead.
Premium Revenues
Undoubtedly, one of the major metrics that boost a health insurer’s revenues is its premiums. Premiums reported by Humana came in at $22.7 billion in the first quarter of 2022, while the metric for Centene totaled $31.9 billion in the same time frame. Thus, CNC wins this round.
Conclusion
Our comparative analysis shows that Humana is better-placed than Centene with respect to the earnings surprise history, ROE, robust 2022 prospect and dividend history. Meanwhile, CNC scores higher in terms of price performance, valuation, leverage ratio, premium revenues and membership growth. With the scale tilted slightly toward Centene, the stock appears to be better poised.