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Humana or Anthem: Which is a Better Health Insurance Stock?

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A strong U.S. economy has enabled the health insurance industry to stand in good stead. A record-low unemployment rate and a gradual wage increase bode well for this space. High employment and wage growth fuel demand for health insurance and various other health-related services provided by insurers.

Rising enrollment and top-line growth,  increasing contribution from complementary businesses, product modifications, improved service, demographic changes, expansion of international operations, better claims handling, medical cost management, technological investment and upgrade, mergers and acquisitions plus healthy balance sheets have long sustained the mojo for health insurers. The overall bullish scenario reinforces our sentiment to believe that the growth cadence for the sector should continue in the long run.

Per a McKinsey & Co. report, the private payor market in North America is expected to grow from €583 billion in 2010 to €1,421 billion in 2025.

Furthermore, health insurance is one industry, which remains unperturbed by the flaring trade wars and volatile oil prices, causing indexes to fluctuate wildly. Hence, it has performed quite well compared with the broader markets.

The industry has rallied 13.3% year to date, more than thrice the 4% increase clocked by the S&P 500 index.

 

The buoyancy in the health insurance space is further confirmed by its  Zacks Industry Rank within the top 40% (102 of the 256 plus groups). In such a situation, it is a wise idea to invest in health insurance companies.

Some stocks promising sturdy growth in this flourishing industry are Humana Inc. (HUM - Free Report) , Anthem Inc. (ANTM - Free Report) , Triple-S Management Corp. (GTS - Free Report) and WellCare Health Plans, Inc. (WCG - Free Report) .

While Humana, Anthem and Triple-S carry a respective Zacks Rank #2 (Buy), WellCare sports a Zacks Rank #1 (Strong Buy).

You can see the complete list of today’s Zacks #1 Rank stocks here.


Let’s indulge in a comparative analysis of two health insurers — Anthem and Humana — to decide which is a better stock.

While Humana has a market capitalization of $42 billion, the same for Anthem is $62.3 billion.As both staffing firms hold the same robust Zacks Rank, we are using certain other parameters to find out which company is better positioned.

Earnings Expectations

Earnings growth along with stock price gains is often an indication of a company’s strong prospects.

Humana’s current-quarter earnings are projected to grow 8.9% compared with 23.4% rise for Anthem. Looking at the full-year 2018 picture, Humana’s earnings are estimated at 19.5% growth while the same for Anthem is expected to increase 27.9%.

Thus, Anthem has an edge over Humana in terms of quarterly and annual earnings growth projections.

Earnings Surprise History

A stock’s earnings surprise history helps investors derive an idea about its performance in the previous quarters.

Both Humana and Anthem boast a decent earnings surprise history with the metric having surpassed the Zacks Consensus Estimate in all the last four reported quarters for each company.

However, Anthem visibly has a vantage point over Humana in terms of its average positive earnings surprise, which reads 7.2%. While Humana’s average beat stands below at 6.2%.

Net Margin

Net profit margin aids investors to evaluate a company’s business model in terms of pricing policy, cost structure and operating efficiency. It also shows how good it is at converting revenues into profits. Hence, a strong net profit margin is preferred by all classes of investors.

With a TTM net margin TTM net margin, Anthem compares favorably with the Humana’s ROE of 3.3%. Though both companies lag the industry’s 4.9% TTM net margin, Anthem still commands a better margin profile.

Valuation

The Price to Earnings Ratio (P/E) metric is used for measuring a company's value in relation to its earnings. In general, a lower number or multiple is preferred to a higher one.

The trailing 12-month price-to-earnings multiple for Anthem and Humana is 15.2 and 19.8, respectively, while that of the industry is 17.9.
Going a step further and baking in both the companies’ growth rates shows a 12-month PEG ratio of 1.44 for Humana and 1.30 for Anthem compared with the industry’s PEG ratio of 1.37.

This clearly shows that Anthem is more valued than Humana.  

Bottom Line

Our comparative assessment shows that Anthem is much better placed than Humana on all fronts.

From a fundamental perspective too, Anthem dwells on a firmer ground with guidance raised for 2018, increased membership strength, a sound balance sheet, numerous accretive acquisitions as well as growth in service business, which seem to drive the stock in the coming months.

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