A number of managed care stocks are either making 52-week highs or trading right near them as investors can't seem to get enough of them. On a trailing 12 month earnings multiple they look fairly valued; however, applying a five-year multiple to adjust for the business cycle suggests that either they are being overvalued by the market or the market expects higher margins in the future. Keep in mind, managed care companies have two drivers of their business: Price of the plans and population growth. The latter is going to be slow and the former will be pressured with the new healthcare laws. Although the healthcare population will skew a lot more towards Medicare as baby boomers age, Medicare plans are less profitable than commercial plans.
UnitedHealth (UNH) is the largest of the managed care organizations (MCO) and has exposure to the commercial, Medicare, and Medicaid markets. It is currently trading at a trailing P/E of 12.2 with a dividend yield of 1.3% and it set a new 52-week high on Tuesday of $52.25. The company’s 2010 results were boosted by margin expansion, as were the rest of the group’s, as the operating margin rose to 8.6% from 7.3%. That was the second year in a row margins expanded after the dreadful 2008, when the operating margin collapsed 380 basis points y/y. Over the past five years, the company has reported an average EPS of $3.24. Applying that EPS, leads to a trailing P/E of 16.1.
WLP is the next largest MCO with a market cap of $29.1 billion versus United’s $56.6 billion. It is the company most associated with Blue Cross Blue Shield. Compared to UnitedHealth, WellPoint is more tilted to the commercial plans. However, it seems like the company is starting to put more emphasis on the Medicare market after the company’s recent purchase of CareMore, a senior-focused healthcare delivery program with 54,000 members. WellPoint is trading at a trailing P/E of 10.8 with a dividend yield of 1.3%. Applying a five-year average EPS of $5.41 (2009 EPS was adjusted to exclude gains from the Express Scripts transaction) leads to a P/E multiple of 14.6, not a bargain at all.
Aetna (AET) is the third biggest with a market cap of $16.9 billion. Aetna is very exposed to the commercial markets, with 91% of its medical membership commercial. The stock is trading at a trailing P/E of 10.2 with a 1.4% dividend yield. Applying its five-year average EPS of $3.26, leads to an earnings multiple of 13.7. Aetna is trading 3% off its 52-week high.
HUM is the smallest of these four companies, with a market cap of $14.8 billion. Humana is the big Medicare player. The stock is trading at a trailing P/E of 12.0 with a 1.3% dividend yield. Applying its five-year average EPS of $4.85, leads to an earnings multiple of 16.8. Humana just set a new 52-week high on Tuesday of $82.00.