Managed Care Industry: Positioned for Growth

We are always very interested in emerging market trends as we look into the future, and healthcare seems to be one industry on the rise. Joined by Zacks senior analyst Chris Kallos, we talked about a couple of the major healthcare companies on which he has a Buy recommendation at the present time.

Where do you currently stand on large-cap health benefit stocks under your coverage?

Recently, I reissued Buy recommendations on two such companies: Humana (HUM) and WellPoint (WLP). HUM is one of the largest publicly traded health benefit companies in the U.S. and Puerto Rico with approximately 11.5 million members in medical benefit programs and approximately 6.8 million members in specialty product programs. WellPoint is the largest publicly traded commercial health benefits company, and the largest of the Blue Cross Blue Shield [BCBS] plan providers, in terms of membership in the U.S.

Tell us a little about your positive sentiment on Humana.

Ahead of the company’s first-quarter earnings report, we upgraded the shares from Hold to Buy. The company then reported better-than-expected net income of $80.2 million (up 13% year over year), or EPS of $0.47, compared with net income of $71.2 million, or EPS of $0.42 in 1Q08. Consolidated revenue in 1Q08 was $6.96 billion, up 12% year over year, compared with $6.20 billion in the most recent quarter.

Restructuring initiatives and increased use of technology have streamlined operations and improved operational efficiencies over recent years. HUM is one of the nation’s largest health care plan providers in the United States, with approval from The Centers for Medicare & Medicaid Services [CMS] to offer the Medicare Part D prescription drug plan [PDP] to the more than 42 million Medicare eligible beneficiaries.

The company’s new product design has in recent years focused on meeting the demand for greater self determination by employers and members for varying levels of co-payments, deductibles, coinsurance, benefits levels and price. Restructuring initiatives and increased use of technology have streamlined operations and improved operational efficiencies over recent years.

How do you arrive at your price target for Humana shares?

We have valued HUM on a forward price/earnings (P/E) basis, as well as a comparison to similar firms in the managed care sector. Our $56 price target is derived using a P/E multiple of 12.9 times (x) FY08 EPS of $4.35.

In what way is the WellPoint story different?

As the largest of the Blue Cross Blue Shield plan providers in the United States, and therefore brand recognition amongst the senior population, WLP is well positioned to benefit from Medicare initiatives such as the introduction of Part D and favorable demographic trends.

We believe WellPoint is well positioned to maintain earnings momentum growth both organically and via acquisitions over the next several years. The company’s broad product offering includes traditional health insurance offerings (such as HMO, PPO, POS and Indemnity plans), targeting individuals, small and large employer groups, national accounts and government-funded beneficiaries.

In addition, WLP has several specialty products marketed to all customers such as group life and disability insurance, pharmacy benefits management, plus dental, vision and behavioral health services. Our $69 price target is derived using a P/E multiple of 12.5x our revised FY08 EPS of $5.53 following management s lowered FY08 guidance.

What is your current outlook for managed care overall?

Our outlook for the managed care industry is neutral, albeit with a positive bias. This industry has benefited in the last few years from favorable demographic trends and expanded Medicare reimbursements. We believe managed care organizations will continue to benefit from current developments in consumer directed health, growth of self-insurance/individual and small group plans, and more recent introductions of Medicare part D.

Chris Kallos is a senior analyst covering the healthcare industry for Zacks Equity Research.

Comments

[thomas728:]

Help out an old soldier.......will ya ?

Both HUM and WLP came off like a rock at about the same time.

What would have caused this event in two stocks simultaneously.

Thanks..........Tom Durkin

2008 Jun 10 05:24 PM

[andyn:]

Be careful about these stocks since the landscape could change after a new president comes in.
There are immense pressure to restrict premiums being charged as well as their cost is increasing, squeezing their margins. I would be happy to buy some puts till Jan to see how the elections shape out.

2008 Jun 11 09:28 AM

[User 220541:]

given the issues other competitors facing such unh and aet, don't see these stocks going anywhere soon. good to short

2008 Jul 08 02:00 PM