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Anthem or Humana: Which HMO Stock is a Better Buy for 2019?

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With many economists anticipating recession in the United States in 2019, investment in the Health Maintenance Organization (HMO) industry seems like a prudent move given its defensive nature. However, a federal judge in Texas threw a spanner in the works by ruling that the Affordable Care Act (“ACA”) is unconstitutional. Nevertheless, the ruling has been  appealed in the Supreme Court, and ACA will remain in force until the final verdict. Consequently, the industry is expected to remain unaffected by the ruling at least in 2019. So, let’s delve a little deeper and analyze the factors that are likely to influence the industry.

The industry is anticipated to witness sustained growth across the markets, particularly in expanding government programs. Medicare business is expected to stay on growth trajectory as the population ages and becomes even more polychronic, in turn increasing the value of products delivered by the HMOs compared with Original Medicare.

Another government business, Medicaid is likely to grow as states continue to expand coverages and traditional fee for-service offerings move to managed care. Medicaid players in the industry are likely to witness persistent intense competition in Request for Proposals (RFP) in 2019 and beyond. The dependence of states on innovation and fiscal discipline of managed care has resulted in increased RFP activity, as states are looking for options to provide health care coverage to as many people as possible in effective ways.

Business combinations will continue to be one of the primary ways by which players will seek to improve their capacities to serve more people in more geographies.  These players will also continue to diversify business, and achieve scale and service efficiencies.

The Health Insurer Tax (“HIT”) deferral combined with CMS rates for 2019 resulted in meaningful benefit investments from most managed care organizations. This is likely to lead to expanding Medicare Advantage footprint in 2019.

The stabilization of health insurance exchanges are another positive. Administrative actions (such as encouraging people to maintain continuous coverage and attracting younger and healthier people to join the market) taken last year by the CMS  have started to yield results as evident from the return of some players to markets they exited in 2016 and 2017. Some of the returning companies include Anthem, Wellmark, Molina Healthcare Inc. (MOH - Free Report) , and Cigna Corp. (CI - Free Report) .

All in all the health insurance industry is poised well for growth in 2019.
Amid this scenario, let’s focus on two HMO stocks, namely Anthem Inc. (ANTM - Free Report) and Humana Inc. (HUM - Free Report) , to ascertain which is a better investment option for 2019. Both these companies have exhibited steady performance, stable earnings and cash flow generation.

Both the above mentioned stocks carry a Zacks Rank #2 (Buy). While Anthem has a market capitalization of $65.96 billion, the same for Humana is $38.63 billion. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price Performance

Shares of Anthem and Humana have returned 9.2% and 4.7%, respectively, compared with the industry’s growth of 9% over the same period.

Debt-to-Capital Ratio

The debt-to-capital ratio is a good indicator of the financial position of a company. The indicator reveals how much debt is utilized to run the business. Anthem and Humana’s debt-to-equity ratio stands at 62.4% and 48.8%, respectively, compared with the industry’s 61.4%.

Return on Equity (ROE)

ROE is a measure of a company’s efficiency in utilizing its shareholders’ funds. In the trailing 12 months, ROE of Anthem and Humana stands at 14% and 19%, respectively. Both the companies underperformed the industry’s ROE of 22%.

Long-Term Earnings Growth and Surprise Trend

Earnings of Anthem and Humana are expected to improve 13.1% and 14.6% in the long term (three to five years). The industry is expected to grow by 13.2%.

Anthem and Humana both have outpaced the Zacks Consensus Estimate in each of the four reported quarters and recorded average positive earnings surprise of 5.11% and 4.73%, respectively.

Estimate Movement

For 2019, the Zacks Consensus Estimate for Anthem has moved up 0.4% to $17.59 in the past 60 days, while the same for Humana was revised up by 1% to $17.50.

Outcome

Markedly, it is quite evident from the above comparisons that Humana is a better HMO stock to accumulate.
 

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Cigna Corporation (CI) - free report >>

Humana Inc. (HUM) - free report >>

Anthem, Inc. (ANTM) - free report >>

Molina Healthcare, Inc (MOH) - free report >>

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