Health insurance industry has put up a robust performance over the years despite regulatory shackles. The industry’s revenues, profits and memberships have witnessed continued growth.
Growing Medicare and Medicaid business, owing to changing U.S. demography, should fuel demand for the products and services provided by the industry.
Against this backdrop, lets analyze Magellan Healthcare (MGLN - Free Report) and Molina Healthcare (MOH - Free Report) , both carrying a Zacks Rank #1 (Strong Buy) and with market capitalization of $1.58 billion and $9.6 billion, respectively. You can see the complete list of today’s Zacks #1 Rank stocks here.
Factors Driving the Health Insurance Industry
The most prominent factor driving growth for the players would be a changing U.S demography, which features growing baby boomer population, driving demand for Medicare Advantage (“MA”) plans, a substitute for Government sponsored Medicare plan for retirees.
Another attractive growth opportunity for the health insurers is Medicaid. This program has presented a solid growth opportunity over the past decade as states have continued to move toward managed care, in an effort to better manage rising costs and as a result of ACA-driven expansion. As many as 36 states have opted for Medicaid Expansion, with the remaining 14 having very low chances as they are under Republican control.
A strong balance sheet has allowed players to consolidate by acquiring companies. Recent mergers in the health insurance space have brought together health insurers and pharmacy benefit players. In-house PBM would allow health insurers to gain more control on drugs and thus management of medical costs.
Let's see how Molina Healthcare and Magellan Health are placed in the rapidly growing industry.
Both the companies have outperformed the industry (down 1.2%) so far this year. While shares of Molina Healthcare have gained 33.6%, Magellan Health has rallied 14.3%.
Other stocks in the industry WellCare Health Plans, Inc. (WCG - Free Report) and The Joint Corp. (JYNT - Free Report) have gained 21% and 94%, respectively, during the same time frame.
Return on Equity (ROE)
ROE is a measure of a company’s efficiency in utilizing shareholders’ funds. ROE for the trailing 12 months for Molina Healthcare and Magellan Health is 49.2% and 3.83%, respectively. Further, with industry’s average of 23.05%, Molina Healthcare is more efficient in using shareholders’ funds.
Molina Healthcare clearly has an edge here.
Earnings Estimate Revisions & Growth Projections
Analysts seem to be bullish on Molina Healthcare’s financial performance. Thus, the Zacks Consensus Estimate for 2019 earnings of $10.94 has moved 0.6% upward over the past seven days. Also, it indicates growth of 3.11% from the year-ago reported figure. The stock has a long-term expected earnings growth rate of 13.2%.
Meanwhile, Magellan Health’s consensus estimate for 2019 earnings of $3.92 has marginally gone down over the past seven days. However, it implies growth of 59%. The stock has a long-term expected earnings growth rate of 23.8%.
Therefore, this too is in favor of Molina Healthcare.
Magellan Health’s net debt-to-capital ratio is 25.52% compared with Molina Healthcare’s -64.45%. The industry’s average for the same is 23.58%. Net debt is calculated by deducting cash and cash equivalents from a company’s debt.
In case of Molina Healthcare, the ratio is negative which shows that its cash and cash equivalents are greater than its debt, which implies that the company can take care of its debt by using its cash and cash equivalents. However, the same ratio for Magellan Health is positive which means its debt is greater than its cash. Having debt greater than cash is fine as long as the company can service its debt, but a comparison of both the companies would place Molina Health in a better position.
Molina Healthcare seems undervalued when compared with the broader industry. Its forward 12-month price-to-earnings (F12M) ratio is below the industry average.
The valuation of Magellan Health is on par with the industry.
Our comparative analysis indicates that Molina Healthcare is placed better than Magellan Health in all respect.
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