3 HMO Stocks With Reasonable Valuations and Increasing Earnings Estimates

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 |  Includes: ANTM, HUM, UNH
by: Bret Jensen

It has been a good six days in the market. However, I still believe the rest of the year will be rocky. I am therefore looking in the defensive sectors to put any new money to work. One of those sectors is Healthcare. I am currently looking at several HMO stocks even though they have had a good run after it became apparent that Obamacare would not be the end of them. Here are three with reasonable valuations, increasing earnings estimates, and that are priced under some analysts’ price targets.

Humana (NYSE:HUM) - Humana Inc. offers various health and supplemental benefit plans in the United States. Its Government segment consists of beneficiaries of government benefit programs; and operates in three lines of businesses, including Medicare, Military, and Medicaid. The Medicare program provides hospital and medical insurance benefits to persons of age 65 and over and some disabled persons under the age of 65. The Military program offers health insurance coverage to the dependents of duty military personnel, and to retired military personnel and their dependents.

Overview – Humana sells for less than 12 times this year’s projected earnings and around 11 times next year’s consensus EPS. Consensus earnings estimates have risen by around 10% over the last ninety days for both 2011 and 2012’s projected earnings. Even after Humana’s large run up in its share price, HUM sells in the bottom half of its five year valuation range based on P/S, P/E, P/B and P/CF. Humana sells for 4 times trailing revenues and around 6 times operating cash flow. Humana’s earnings and revenues are being driven by better than expected Medicare enrollments which should continue through at least the medium term. HUM sells at $83 a share and yields 1.2%. Price targets are at $90 at S&P and $100 at Credit Suisse.

UnitedHealthGroup (NYSE:UNH) - UnitedHealth Group Incorporated provides healthcare services in the United States. Its Health Benefits segment offers consumer-oriented health benefit plans and services to national employers, public sector employers, mid-sized employers, small businesses, and individuals; and non-employer based insurance options for purchase by individuals. It also provides health and well-being services for individuals aged 50 and older; and for services dealing with chronic disease and other specialized issues for older individuals, as well as health plans for the beneficiaries of acute and long-term care Medicaid plans.

Overview – United Health is trading at 13 times this year’s expected earnings and under 12 times 2012’s consensus EPS. UNH has absolutely slaughtered earnings estimates each of the last four quarters. In addition, estimates for both 2011 and 2012 have risen significantly over the past ninety days. Despite United Health’s nice price appreciation in 2011, it still sells in the bottom 40% of its five year valuation range based on P/S, P/E, P/B and P/CF. United’s earnings have been driven by increased Medicare enrollment, better service business(Optum) growth and lower costs than its peers. All three trends should continue for the foreseeable future. UNH is selling at $53, has an A- rated balance sheet and yields 1.2%. Credit Suisse has a price target of $69.

WellPoint, Inc. (WLP) - WellPoint, Inc., through its subsidiaries, operates as a health benefits company in the United States. It offers various network-based managed care plans to large and small employer, individual, Medicaid, and senior markets. The company’s managed care plans include preferred provider organizations; health maintenance organizations; point-of-service plans; traditional indemnity plans; and other hybrid plans, including consumer-driven health plans, hospital only, and limited benefit products. WellPoint also provides various managed care services comprising claims processing, underwriting, stop loss insurance, actuarial services, provider network access, medical cost management, disease management, wellness programs, and other administrative services.

Overview – Wellpoint is selling at under 11.5 times this year’s expected earnings and less than 10.5 times projected 2012’s EPS. It has crushed earnings estimates each of the last four quarters and estimates for 2011 and 2012 have risen substantially over the past three months. Wellpoint has gone up more than 30% so far in 2011, yet still sells in the bottom third of its five year valuation range based on P/S, P/B and P/CF. The recent acquisition of CareMore should help continue its growth in earnings and revenues. Wellpoint is selling at $80 a share and yields 1.2%. Credit Suisse has a price target of $96 on Wellpoint.

I think all three stocks are good values. However, I think the market overall will pull back and I will be looking at picking up these shares more heavily after a 5% to 10% selloff and/or pick up a position by selling slightly out of the money puts.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in UNH over the next 72 hours.