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Forget Cigna (CI), Buy These HMO Stocks Instead

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Cigna Corp. (CI - Free Report) is going through a rough patch with niggling concerns like an underperforming Life and Disability segment, CMS sanctions on the sale of Medicare Advantage policies, a weak public exchange business and uncertainty surrounding the Anthem merger. These compelled the company to cut its full-year 2016 earnings guidance to $7.75–$8.10 per share from $8.95–$9.35.

Cigna has one of the greatest shares in the Disability market. But this business has become increasing unpredictable and volatile in recent years. The segment suffered due to modifications made to the disability claim process. The modification includes upfront medical review of claims to conduct further physical examinations, deeper medical history reviews and enhanced documentation. These modifications resulted in longer claim cycles, thereby increasing disability durations and claim inventory which did not favor its business in the first half of 2016. Investments are being made in this segment to strengthen the operational processes in a manner that will lead to improved customer experience and lower claim volatility. The life subsegment suffered from a spike in claims. Though the company is taking necessary steps to restore profitability of the segment, we would remain cautious until we see it posting favorable earnings.

Another friction faced by the company is the blockage of the deal to merge with Anthem by the Department of Justice. The deal may now be delayed to 2017. The merger, which would have raised the rank of the company in the industry is now shrouded in uncertainty. Any delay would adversely impact the company and come in the way of its desired operational performance. In fact, in 2015 the company incurred a loss of $57 million in connection with the anticipated merger and $62 million in the first half of 2016. Unfavorable refinancing expenses and unexpected costs associated with the delay can be a matter of concern.

The company also faces restriction from the Centers for Medicare & Medicaid Services (“CMS”) regarding the sale of Medicare Advantage policies. Effective Jan 21, 2016, the CMS imposed sanctions suspending Cigna's enrollment and marketing activities related to all Cigna Medicare Advantage and standalone prescription drug plan contracts.  To date, it remains unclear as to when these might be lifted. The sanctions point directly to failure to comply with coverage determinations, appeals and grievances, and Part D administration which CMS characterized as “systemic” and “longstanding” and unchanged even several years after warning the company. Cigna won’t be allowed to market or sell Medicare Advantage policies or Part D drug plans to new clients in the open enrollment season that will start in mid October. If Cigna is unable to address these issues prior to open enrollment, its MA membership will be hit hard and be a drag on its earnings.

Moreover, Cigna is currently losing money in its public exchange business. It is mulling over discontinuing operations in the Texas market. Though the company said that it has intentions to selectively expand its public exchange presence to a few new geographical regions in 2017, we view this as quite unlikely in the light of similar comments coming from Aetna and UnitedHealth just after pulling back from the exchanges citing increasing losses.

While Cigna, which carries a Zacks Rank # 5 (Strong Sell) remains mired in its problems, we take this opportunity to look at other health maintenance organization (HMO) stocks in the space providing better investment opportunities. These include Humana Inc. (HUM - Free Report) , United Health Group Inc. (UNH - Free Report) and WellCare Health Plans, Inc. . We have picked these three stocks using our style score system. Not only do they have a solid Value Style Score of ‘A’ or ‘B’ and a favorable Zacks Rank #1 (Strong Buy) or #2 (Buy), they also witnessed a rise in earnings estimates over the past 60 days.

CIGNA CORP Price and Consensus

CIGNA CORP Price and Consensus | CIGNA CORP Quote

The Picks

Humana with a Zacks Rank #1 has strong fundamentals. Its strong-performing individual Medicare Advantage and other government-sponsored plans remain the highlights. Also, its Healthcare Services business is well poised and will contribute to its growth. Last month, Humana won a contract from the U.S. Department of Defense to administer TRICARE benefits to about 6 million people, which nearly doubles the number of military beneficiaries served by Humana.

However, challenges in its individual commercial medical business pose as concerns. Also, its merger with Aetna remains uncertain. Nevertheless, the company raised its 2016 earnings guidance to at least $8.56 from $8.32 predicted before. Humana has also witnessed a 4.3% increase in its Zacks Consensus Estimate to $9.23 per share for 2016, over the past 60 days, with 11 out of 12 analysts covering the stock raising their estimates. Its long-term EPS growth rate is 13.5%. It has a Value Style score of ‘B’.

HUMANA INC NEW Price and Consensus

HUMANA INC NEW Price and Consensus | HUMANA INC NEW Quote

UnitedHealth, with a Zacks Rank #2, is the most diversified health maintenance organization. Though the company remains troubled by its public exchange business and has exited most of the markets, it  is still attractive given the strength in its other business segments. Instead of its heavily regulated Health Benefits business, the company is focusing on investing and growing its health services business branded as Optum.
To this end, the company acquired Catamaran last year. The acquisition is evidently fruitful thanks to the revenue accretion from it. Optum is becoming an increasingly valuable business and is expected to contribute about 42% to UnitedHealth Group’s consolidated operating earnings this year.

Also, the company’s membership has grown over the past five years by nearly 13.5 million or 40% well diversified across commercial, government programs and international offerings. The company’s membership is further set to grow 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.

Moreover, UnitedHealth witnessed an increase in the 2016 Zacks Consensus Estimate to $7.90 per share from $7.88, over the past 60 days, with eight out of 14 analysts covering the stock raising their individual estimates. Its long-term EPS growth rate is 13.4%. It has a Value Style score of ‘A’

UNITEDHEALTH GP Price and Consensus


WellCare Health Plans with a Zacks Rank #2 remains well poised to grow in the Medicaid, Medicare and Medicare Part D business. During the second quarter, it closed the Advicare transaction, gaining greater Medicaid presence in South Carolina. The company is taking both organic and inorganic steps to fuel its growth and trying to double its revenues between 2017 and 2021.

The company also increased its 2016 adjusted earnings per diluted share guidance to a range of $4.95 to $5.05 from its previous guidance of $4.55 to $4.70.

WellCare Health also witnessed a 7.5% increase in the Zacks Consensus Estimate to $5.01 per share for 2016, over the past 60 days, with each of the nine analysts covering the stock raising their individual estimates. Its long-term EPS growth rate is 17.7%. It has a Value Style score of ‘A’.

WELLCARE HEALTH Price and Consensus


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