The HMO industry is on a tear, according to Abhijit Ghosh at Zacks.
This industry is currently ranked #16 out of 265 industries of Zacks Industry ranks (top 6%). In the last week alone, there were 13 positive analyst EPS revisions and only 6 negative EPS revisions handed out. Why are HMO stocks so hot right now?
First, the ACA (affordable care act) guarantees more insurance customers. Within this industry, UnitedHealth Group (UNH) , Anthem (ANTM) , Aetna (AET), Humana (HUM) and Cigna Corp. (CI) are the five largest for-profit health insurers. Humana is the smallest.
Second, all HMOs are in play for mergers and acquisitions.
On the negative side, the HMO insurance business is already a very concentrated industry. It might be a sign of froth in the overall domestic large-cap stock market to hear about potential huge HMO mergers. Yet, merger talk lights the analyst community up — M&A can have a big effect on share prices.
Anti-trust issues would be enormous hurdles for any deal. If five giant HMO companies become four, an approved merger makes it tougher for the remaining four guys to get approval. In light of that, these guys will race to the altar. It may not matter who gets there first, if all are blocked.
Aetna and Cigna are rumored to be interested buyers for Humana, a dominant Medicare Advantage company. Cigna serves employers mostly. Aetna’s business is spread across employers, Medicare, and Medicaid.
As an example, an Aetna and Humana merger would build up market share in the Medicare area. This is not going to make the Federal government happy. There is also a large degree of regional overlap in the Aetna and Humana business mix. These are two very big issues that will attract anti-trust scrutiny.
The price tags for Aetna, Cigna and Humana could range from $35 billion to $65 billion or more, using average valuation multiples of healthcare deals this year.
On the revenue side, private Medicare and Medicaid HMO plans have grown larger for two reasons. First, more baby boomers are aging. Second, more low-income people have gained ACA coverage through Medicaid expansion. In turn, the Affordable Care Act (ACA) caps health insurance profits as a percentage of premium revenue.
On the cost side, there are two reasons to merge HMOs for increased scale and to cut costs. First, health insurers have to do battle with consolidated hospital systems, which are ballooning through mergers of their own, and are commanding higher rate increases. Second, prescription drug prices have escalated beyond the overall rate of consumer price inflation.
Bigger insurance companies could better fight back on price increases. Will they pass on any cost savings to consumers? I think big mergers are more likely to help insurer profits than reduce people’s health insurance premiums.
The U.S. government is very skeptical HMO mergers within an already concentrated health insurance industry structure will benefit consumers in any meaningful way. The U.S. government didn’t launch the ACA with the intent to have attained health care cost savings absorbed by enlarged, super-major, health insurance corporations.
Anthem Inc. — This company provides medical products, through its subsidiaries. It operates through Commercial, Consumer and Other segments. The Company offers managed care plans to the large and small employer, individual, Medicaid and senior markets.
The PEG valuation ratio is a decent 1.61. Anything under 2 is OK. The Forward 12-month P/E is 16.17, in line with the overall S&P 500 valuation. The Zacks Growth Rank is A, the Zacks Value Rank is A, and the Zacks Momentum Rank is B.
Analysts are looking for a whopping $10.08 in EPS for 2015, followed by $11.14 in EPS for 2016. That’s a solid +10.5% annual EPS growth rate. Anthem has seen upside surprises of between +1 to +17% over the last 4 quarters. Anthem, Inc., formerly known as WellPoint, Inc., is headquartered in Indianapolis, Indiana. The next quarterly EPS report looks to be around July 29, 2015.
To invest in a big HMO insurer, Aetna Inc. is currently a Zacks #2 Rank.
Aetna is one of the nation’s largest health benefits companies and one of the nation’s largest insurance and financial services organizations. It provides these benefits to employer and plan sponsor customers in all 50 states, ranging from large multisite national accounts to middle-market and small-employer groups.
Aetna’s products include the full range of health insurance, including dental and pharmacy benefits, from HMO and POS to PPO and indemnity, as well as group insurance products such as life, disability and long-term care insurance.
The PEG valuation ratio is a decent 1.58. The forward 12-month P/E is 17.20. The Zacks Growth Rank is A, the Zacks Value Rank is A, the Zacks Momentum Rank is C.
Analysts are looking for a substantial $7.40 in EPS for 2015, followed by $8.20 in EPS for 2016. That’s a solid +10.8% annual EPS growth rate, and in line with the forward EPS outlook at Anthem. Aetna has seen four consecutive upside surprises of between 0% and +22% over the last four quarters. The next quarterly report looks to be around August 4th, 2015.