What follows is a list of healthcare providers that have favorable risk/reward. Most of them offer sustainable streams of free cash flow and are offering a meaningful way to hedge against macroeconomic uncertainty. At the same time, these companies are heavily discounted and trade at low multiples. It is no wonder then that all four of these companies are rated a "buy" or better on the Street. All recommendations are sourced from NASDAQ.
Aetna trades at a respective 8.4x and 7.7x past and forward earnings with a dividend yield of 1.6%. It is rated a "buy" on the Street. Consensus estimates for Aetna's EPS forecast that it will decline by 1.7% to $5.08 in 2012 and then grow by 10.2% and 5.4% in the following two years. Assuming a multiple of 10.5x and a conservative 2013 EPS of $5.56, the stock would hit $58.38 for 35.3% upside.
The company is selling cheaply largely due to weak execution. At the last quarterly earnings call, management revealed that it missed expectations. This is particularly disappointing in light of how competitors UnitedHealth (UNH) and WellPoint (WLP) beat expectations. At the same time, the company is well diversified, has a strong balance sheet, and is led by top management. With the multiple so low, downside is also limited at this point.
UnitedHealth trades at a respective 11.4x and 9.8x past and forward earnings with a dividend yield of 1.2%. It is rated a "strong buy" on the Street. Consensus estimates for UnitedHealths EPS forecast that it will grow by 5.3% to $4.98 in 2012 and then by 11.6% and 10.6% in the following two years. Assuming a multiple of 10.5x and a conservative 2013 EPS of $5.50, the stock would hit $57.75 for 5.5% upside. This upside is not particularly attractive, but it is worth noting that UnitedHealth is the least volatile of the four stocks highlighted herein.
Moreover, the company delivered strong performance in 2011 and remains committed to trimming costs. Perhaps most importantly, the company is focusing on emerging market opportunities and thus is well positioned to catalyze free cash flow. If we model a 10.9% per annum growth rate over the next half decade, keep operating metrics at historical levels, assume a perpetual growth rate of 2.5%, and discount backwards by a WACC of 10%, the stock would even be worth $66.80. UnitedHealth's success in penetrating emerging markets and cutting costs will be the main determinants in where the stock goes from here.
Cigna trades at a respective 9.9x and 7.5x past and forward earnings. It is rated a "buy" on the Street. Consensus estimates for Cigna's EPS forecast that it will grow by 3.8% to $5.41 in 2012 and then by 10.9% and 15% in the following two years. Assuming a multiple of 10.5x and a conservative 2013 EPS of $5.96, the stock would hit $62.58 for 38.3% upside.
One main catalyst for Cigna will come from unlocking revenue and cost synergies from Health Spring. The company can now upset ASO-based enrollees in its Commercial business. Cigna delivered sold results in the first quarter after impressive performance in the preceding quarter. Consolidated operating revenues leaped 27% over last year and demonstrates management's strong execution.
WellPoint trades at a respective 9.1x and 7.7x past and forward earnings with a dividend yield of 1.7%. It is rated a "buy" on the Street. Consensus estimates for WellPoint's EPS forecast that it will grow by 11.3% to $7.79 in 2012 and then by 10% and 4.9% in the following two years. Assuming a multiple of 10.5x and a conservative 2013 EPS of $8.48, the stock would hit $89.04 for 34.4% upside.
1Q12 EPS of $2.53 was impressive with the strong performance being driven by gains in the Senior and Commercial segments. In the former, membership grew as a result of expansion into Medicare Advantage. After years of the Senior operations underperforming, this was a very relieving turn to learn about.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: We seek IR business from all of the firms in our coverage, but research covered in this note is independent and for prospective clients. The distributor of this research report, Gould Partners, manages Takeover Analyst and is not a licensed investment adviser or broker dealer. Investors are cautioned to perform their own due diligence.