The health insurance industry is continuing with solid growth on the back of an aging American population and easing regulations. 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, and healthy balance sheets have held the mojo for health insurers.
The industry is continuously evolving with cross-industry mergers and acquisitions that are reshaping business profiles and reducing the number of players, thus giving them greater power to negotiate with hospital and drug companies.
Moreover, regulatory changes have been deferred for a while, as the Trump administration has put on hold any changes to the Obamacare Act until the 2020 presidential elections. This defers the uncertainty and will allow players to focus on their business.
In a year’s time, the Zacks Health Maintenance Organization industry has gained 10.3% in the past year compared with the Zacks S&P 500 composite’s return of 8.6%.
Against this backdrop, let’s do a comparative analysis of two health insurers — Centene Corp. (CNC - Free Report) and Anthem Inc. (ANTM - Free Report) . Centene has a market capitalization of $23.1 billion and the same for Anthem is $75.5 billion.
As both stocks carry a Zacks Rank #2 (Buy), we are using other parameters to give investors a better insight. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Other stocks with the same Zacks Rank as that of Centene and Anthem are WellCare Health Plans, Inc. (WCG - Free Report) and Molina Healthcare, Inc. (MOH - Free Report) .
Centene has witnessed a decline of 4% in the past three months, while Anthem has gained 14.8%. Meanwhile, the broader industry has gained 4% during the same period.
The decline in Centene’s stock makes it attractively priced. Moreover, the stock carries a Value Score of B. Our research shows that stocks with a Value Style Score of A or B when combined with a Zacks Rank #1 or 2 offer the best opportunities in the value investing space.
Return on Equity (ROE)
One of the widely used profitability measures, that tells about the company’s efficiency in using shareholder’s funds shows that Anthem’s ROE was 14.8% while that of Centene’s was 14.1%, compared with the industry’s average of 22.5%, over a one-year period.
Though both of them are almost equal in this respect, Anthem is marginally better off.
Earnings growth along with stock price gains is often an indication of a company’s strong prospects.
Anthem’s 2019 earnings are projected to grow 20.5% year over year while that of Centene are expected to increase 19.8%, compared with the industry’s earnings growth of 14.7%.
Here Anthem has a marginal edge over Centene in terms of yearly earnings growth.
Total debt to equity is one of the measures to gauge an entity’s leverage and it signifies that Centene has lower leverage with total debt to equity ratio of 60.7% compared with Anthem’s 63.3% and industry average of 63.9%.
The most appropriate ratio to evaluate these two health insurance companies is perhaps price-to-earnings ratio.
Notably, Centene with a 12-month forward price to earnings ratio of 12.91 is undervalued than the broader industry, which has PE value of 15.67.
Moreover, with the P/E ratio of 14.38, Centene makes it look cheaper than Anthem.
Though both stocks are underpriced when compared with the industry, Centene is still better priced than Anthem.
Earnings History and ESP
Considering a more comprehensive earnings history, both Anthem and Centene have delivered positive surprises in each of the prior four quarters, with an average positive earnings surprise of 7.04% and 5.05%, respectively.
However, Centene and Anthem have Earnings ESP of 1.35% and -0.44%, respectively, which implies that Centene is at an advantage.
Our comparative analysis shows that Anthem holds an edge over return on equity, earnings guidance and price performance. However, when considering the earnings surprise history, valuation and leverage ratio, Centene holds an advantage over Anthem.
Further, what clinches the case in favor of Centene at this point of time is that it has a positive Earnings ESP, indicating a likely positive surprise. This is why it may be better to bet on Centene over Anthem as both prepare to report earnings later this month.
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