Ultra-Conservative Estimates for Healthcare Service Providers Present an Opportunity

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 |  Includes: AET, ANTM, HUM, UNH
by: David White

Due to the new healthcare bill, healthcare service providers made ultra conservative estimates for 2011. We are now seeing just how conservative those estimates were. Last week, analysts raised their price targets on three of the most prominent healthcare service providers: Aetna (NYSE:AET), UnitedHealth Group (NYSE:UNH), and Wellpoint (WLP). This was likely in response to all of them recently beating EPS estimates for Q1 and increasing their 2011 EPS guidance. See the table below:

Stock

AET

UNH

WLP

Old 1yr Price Target

$42.62

$50.43

$77.93

New 1yr Price Target

$47.14

$55.12

$85.07

Price at close 4/29/11

$41.38

$49.23

$76.79

Old FY2011 EPS Guidance

$3.80

$3.70

$6.30

New FY2011 EPS Guidance

$4.20-$4.30

$3.95-$4.05

$6.70

Gain last week (open Monday to close Friday)

$2.96

$1.98

$5.41

EPS surprise in Q1 (CNBC)

$.46

$.33

$.48

Click to enlarge

Following suit, Humana (NYSE:HUM) reported on Monday, May 2, 2011 before the open. The company beat by $0.37 with EPS of $1.86/share vs. an expectation of $1.49/share. A week ago, Humana initiated a quarterly cash dividend of $.25/share. It increased its stock buyback plan from $250M to $1B by June 30, 2013. Humana raised its EPS estimates for FY2011 to $6.70-$6.90 from $5.95-$6.15. The new forecast represents growth of 4%-7% from FY2010 EPS of $6.47/share. The old estimate called for a decline.

All of the above are experiencing both membership and revenue growth. Some are even buying other companies. For example, Aetna is buying Prodigy Health Group after recently completing the acquisition of Medicity.

All of the above companies increased FY2011 guidance, but they seemed to have done that only by the amount they beat Q1 estimates by. It is becoming clear that the healthcare bill's effects will not be as severe as the companies estimated, at least in the near term (2011). This means that further upgrades to guidance are not only possible, but likely for FY2011. It means that these stocks, which are already good values, may be good investments. With this in mind, I have arranged some of their fundamental data in the table below. The data are from TDameritrade, Bloomberg, and Yahoo Finance.

Stock

AET

UNH

WLP

Price at close 5/2/2011

$42.07

$49.88

$77.18

PE

9.64

12.17

10.49

FPE

9.97

10.89

10.39

Analysts’ 1 year price target

$47.14

$55.12

$85.07

Analysts’ Average Recommendation

2.3

2.0

2.0

Beta

1.0

1.01

1.02

Short Interest as a % of the Float

1.40%

1.00%

1.20%

Price/Book

1.18

2.00

1.18

Price/Cash Flow

8.61

9.03

8.61

Cash per share

$9.22

$10.24

$53.23

EPS Growth Estimate for Next 5 Years per annum

10.14%

11.71%

8.76%

Total Debt/Total Capital (MRQ)

28.99%

30.47%

28.99%

Quick Ratio (mrq)

--

--

--

Interest Coverage (mrq)

15.01

51.76

15.01

Return on Equity (TTM)

12.11%

18.82%

12.11%

EPS Growth (mrq)

24.43%

18.88%

24.43%

EPS Growth (ttm)

-31.29%

24.07%

-31.29%

Revenue Growth (mrq)

-1.18%

9.65%

-1.18%

Revenue Growth (ttm)

-9.79%

9.13%

-9.79%

Annual Dividend Rate

$1.00

$.50

$1.00

Net Profit Margin (ttm)

5.01%

4.97%

5.01%

Click to enlarge

All of these stocks look solid. Each one has something going for it. Aetna has made some recent acquisitions that may help its numbers in the not-too-distant future. UnitedHealth has the best growth profile of the three stocks above. It also seems to have been the best managed in the recent past. UnitedHealth seems to have avoided negative growth figures for the trailing twelve months.

Wellpoint, amazingly, has $53.23 in cash per share. This means the total company is only costing you $23.95/share. That would seem to be a bargain. The markets may be in for some rough times with the end of QE2 and the likely worsening of the EU credit crisis. If most of this stock's value is in cash, it should weather a downturn well.

One caveat is that all of these stocks have ramped up in the last week or so. It might be best to average in, or alternatively it might be good to wait for a dip in the overall market. I have included a 1 year chart of Wellpoint below as an illustration of the recent spike.

Click to enlarge:

Click to enlarge

I note that summer is supposed to be a good time to be in healthcare stocks vs. many other kinds of stocks. In the May-October period, healthcare stocks have historically gone up approximately 5%, while most other stocks have been flat or down (as per the adage "Sell in May and go away"). If others feel they should follow history into healthcare stocks at this time of year, this can only help your trade.

Good Luck trading.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.