Buying Healthcare Stocks for an Obama Presidency (Part II)

In a previous post I spelled out why I am buying healthcare stocks for an Obama presidency. In that post I promised to provide three stocks that would benefit from this fact. The first is Aetna Inc.

Aetna (AET)

Aetna, Inc. operates as a diversified health care benefits company primarily in the United States and Canada. The company provides health insurance products and related services, including medical, pharmacy, dental, behavioral health, group life, and disability plans, as well as medical management capabilities and health care management services for Medicaid plans has been making a strong recovery from its annual loss in 2001, showing consistent EPS growth in the following 7 years.

Many of its competitors have gone through troubling acquisitions, while Aetna has built consistent organic operational growth. Much of this has come through the addition of new product offerings and integration among its segments to optimize cross selling.

I am promoting a buy on AET because of its strong operational success and affordable valuation.

Operational Success

In Q2 we learned that AET has already achieved 72% of its full year membership guidance. This should put the wind at the company's back to meet its full year membership goal of growing medical membership by 50,000 “lives” in 2008.

In 2007, 5.7% of Aetna’s pre-tax income was generated by Medicaid and Medicare healthcare programs. AET is diversifying is revenue streams and seeking to gain greater access to Medicaid and Medicare markets and many analysts estimate that AET could generate over 10% of EBT from these programs in 2008.

Additionally, AET reaffirmed its guidance for full-year 2008 EPS, while other healthcare companies such as Coventry Health Care have had to reduce full year guidance due to cost pressures. AET’s new product offerings, scale, and growth have allowed it to better handle cost pressures.

In my past post, I spoke of the most likely scenario for universal coverage would be for an expansion of the Medicare and Medicaid programs. With AET’s diversification into these growing markets, it will stand to benefit from an Obama presidency.

Valuation

AET trades at 8.9x forward earnings estimates with a PEG of .6 which compares to its industry F P/E multiple of 9.3x. This is the same level in which AET’s valuation bottomed out at in late 2003. I feel that the entire industry will experience a multiple expansion over the next 12-18 months as investors realize that cost pressure will subside and government spending on healthcare will increase. AET should receive the greatest benefit from this multiple expansion due to its strong operational success and growth.

 

Comments

[CrossProfit:]

Didn't buy into your previous argument and still don't follow the logic. If there isn't enough money then it's just that - not enough money.

Expect a Democrat to cut where the Republicans couldn't muster enough political clout to carry out the plan.

"In my past post, I spoke of the most likely scenario for universal coverage would be for an expansion of the Medicare and Medicaid programs" - try the opposite and see how the pieces of the puzzle fit!

CrossProfit (non consensus)

2008 Aug 04 08:41 AM

[bbowen7:]

Obama has promised to offer coverage to 40,000,000 people, many who who cannot afford it; and to reduce the cost to current families by $2500. Absurd, but he will try to move in that direction. Where will the money come from, if not from the doctors and the insurance, hospital, and pharma companies?

2008 Aug 04 10:11 AM

[Capitalist Cow:]

RightinSanFrancisco,

You need to separate campaign promises from what is most likely to happen. Every election season we hear large promises. When someone gets into the office, they realize you can’t do everything and there are sometimes more pressing issues than what you campaigned for.

At this point in the campaign, no one is talking about how they are going to pay for their plans. Why would he not increase the percentage paid from payroll taxes? This would be the easiest to accomplish as it would world within the current framework? - creating a new tax framework to tax health care companies would be extremely difficult to do, as in 1992.

2008 Aug 04 11:12 AM

[fireball:]

with obama and nationalized healthcare i would consider that company that is jellin like a felon to ease the many feet that will be standing in looooong lines waiting to get a ration of what they need. oh and probably those that make aspirin and things like valium for dealing with new tiers of beauracracy.

2008 Aug 04 12:00 PM

[Alan Young:]

First, it doesn't matter that much who is president. The economic reality on the ground is the most potent force.
And the economic reality is, health care is increasingly expensive, and we can't afford it in its current form. We pay too much for drugs, for insurance, for hospital overhead, for research--when what most patients want is CARE, which is not provided by most of the current players in the system, and is certainly not advanced by corporate profits.
So one way or another, cost control is going to hit the industry, hard. Demand will grow, yes, but demand at low margins, please. I don't think the body politic will allow corporations to profit more than they do now from our frailties.

2008 Aug 04 12:00 PM

[fireball:]

the money will come from any who commit the sin of applied ambition and productivity.

2008 Aug 04 12:02 PM

[fireball:]

gee could the adept federal hand have made a mistake and killed all hope of competitve service and pricing decades back?

2008 Aug 04 12:07 PM

[valueinvest...:]

I would buy stocks during the Obama presidency, but that 47% tax rate will make it tough on me. I always knew I hated socialism just didn't think I would have to live in it. I really do hope McCain wins.

2008 Aug 04 01:47 PM

[Stevo1040:]

Your article is right on the money. Don't believe the whol national healthcare hype. Obama will give more money to insurance companies and that will stimulate competition. 40,000,000 people dont have coverage, 260,000,000 do. Obama wont screw that up.

2008 Aug 04 04:26 PM

[sjohnsonl:]

THERE IS NO WAY OBAMA CAN DO WHAT HE SAYS HE WILL DO.
HE IS ALL TALK. ALL HE WANTS IS VOTES FROM ALL THE PEOPLE WHO THINK THEY WILL BE GIVEN A FREE RIDE AT THE EXPENSE OF THOSE WHO HAVE WORKED HARD ALL THEIR LIFE AND MADE SOMETHING OF THEMSELVES.
THESE INDIVIDUALS ALREADY PAY 40% OF THE TAXES THE
US RECEIVES AND THEY REPRESENT ONLY 1% OF THE US POPULATION. JUST HOW MUCH MORE DOES OBAMA WANT
THESE INDIVIDUALS TO PAY. HE IS SO IGNORANT OF WHAT THE REAL FACTS ARE CONCERNING THE NEEDS OF THIS NATION.

2008 Aug 04 06:37 PM

[Joyful Alte...:]

You're right as far as you go, Aalan, but what has to go are all these "competing" health insurance companies like Aetna. All medical providers waste enormous amounts of time and money to fill out all the different forms for all the different corporations, and then spend even more to try to figure out why the profitable corporation rejected the claim.

Let's cut out the middleman and go to single payer health insurance.

2008 Aug 04 07:26 PM