Comparing The New 3 Largest Health Care Plans Companies

Includes: CVS, ESRX, UNH
by: Joseph Cafariello


The Health Care Plans industry is expected to outperform the S&P broader market substantially this and next quarters, and meaningfully next year and beyond.

Mean/high targets for the 3 largest Health Care Plans companies - CVS Health Corporation, UnitedHealth Group Incorporated, Express Scripts Holding Company - range from 8% to 31% above current prices.

Find out which among CVS, UNH and ESRX offers the best stock performance and investment value.

* All data are as of the close of Wednesday, March 25, 2015. Emphasis is on company fundamentals and financial data rather than on commentary.

The National Center for Health Statistics this week published its "Early Release of Estimates From the National Health Interview Survey of January-September 2014", updating a whole batch of health insurance statistics. This seems like a good time to revisit the Health Care Plans industry, especially since there is a new number one player recently reallocated to this category.

The new top three players in this space currently are: CVS Health Corporation (NYSE:CVS), UnitedHealth Group Incorporated (NYSE:UNH), and Express Scripts Holding Company (NASDAQ:ESRX). All three companies have vastly outperformed the broader market index throughout the six-year economic recovery, and especially since new mandatory health insurance laws came into effect at the start of 2014.

Since the economic recovery began in early March of 2009, as graphed below, where the broader market S&P 500 index [black] has gained 205%, and the Healthcare Select Sector SPDR ETF (NYSEARCA:XLV) [blue] has gained 232%, the second-largest Health Care Plans company, UNH [purple], has beaten all with gains of 550%, while the largest, CVS [beige], places second with gains of 330%, and the third-largest, ESRX [orange], finishes third with gains of 270%.


But if we look at the start of 2013, we'll notice that after about a year of flat-lining, the three largest Health Care Plans companies have been enjoying a new up-leg, which has continued increasing in momentum since. What happened in 2013 that lit a fire under these stocks? The realization that mandatory health insurance coverage was going ahead as planned for the start of 2014.

As noted by, as graphed below, Americans quickly took to the program beginning in October 2013, with Exchange QHPs (Qualified Health Plans) obtained through the government's new Health Insurance Marketplace exchanges reaching some 2.25 million plans by the end of that year.

The first five months of 2014 then saw a continuing surge of enrolments of another nearly 6 million participants, raising the total to over 8 million by May 1. By November of 2014, the total of enrollees in insurance plans through the government's new exchanges was estimated at 9.7 million, as graphed below, but was later revised up to 10.7 million.


But the boon to healthcare insurance providers continued throughout 2014, as this week's NCHS estimates for the first three quarters of 2014 show, as tabled below.

While many of these enrollees had transferred over from employer-sponsored insurance plans, it is estimated that at least 71% of 2014's 10.7 million new marketplace plans, some 7.6 million, were new insurance recipients who were previously not insured. Where the number of uninsured Americans had remained fairly consistent in the mid-40 million area from 2009-13, the number of uninsured plunged dramatically when health insurance became mandatory beginning in 2014 - dropping by 7.6 million people, or 16.9%, from 44.8 million in 2013 to 37.2 million by Q3 of 2014 (green box below).

(Source: National Center for Health Statistics)

During the 2015 enrolment period, which only just recently ended, the number of enrollees has grown by another 2.1 million from 10.7 million in November 2014 to 12.82 million estimated by mid-March 2015, as graphed below.


The growth of our three largest Health Care Plans companies over the past year certainly shows how the continuing expansion of medical insurance coverage has been boosting their stock values, as graphed below.

Over the past 12 months, where the S&P has increased by 10% and XLV has grown by 25%, the second-largest, UNH, and the largest, CVS, have beaten both benchmarks with gains of 44% and 37%, respectively, while third-largest ESRX has tied the broader market with gains of 10%.


So what does the future hold in store for our Health Care Plans companies? Undoubtedly, more of the same, especially since there still remain some 28.6 million more potential QHP enrollees, as per ACASignUps estimates - or some 2.2 times the number currently enrolled. That represents an awful lot of room into which Health Care Plans companies can grow.

Analysts are, thus, expecting some fantastic growth for the industry going forward, as tabled below, where green indicates outperformance, while yellow denotes underperformance relative to the broader market.

Over the next two quarters, the industry's earnings are expected to outgrow the S&P's average growth at some 3.57 to 4.66 times its average rate, before slowing to a more sustainable but still robust 1.43 to 1.67 times over the longer term.

Zooming in a little closer, the three largest Health Care Plans companies are expected to split-perform near term, before surging ahead once again longer term, as tabled below.

Over the current quarter, UNH is expected to outgrowth the S&P's average earnings at some 2.66 its rate, followed by ESRX at some 1.35 times, while CVS misses by a few percentage points.

Over the next quarter, however, all three are seen falling short of the broader markets' growth rate, likely since it represents the first quarter following the closing of the 2015 health insurance enrolment period.

Over the longer term, all three companies once again outshine the broader market with growth rates at some 1.26 to 1.92 times the S&P's average, with CVS leading the way this time.

The companies' 5-year PEG ratios are also worth noting here, since investors can currently buy into CVS and ESRX's above-average growth rates for below-average 5-year PEG ratios.

Yet, there is more than earnings growth to consider when sizing up a company as a potential investment. How do the three compare against one another in other metrics, and which makes the best investment?

Let's answer that by comparing their company fundamentals using the following format: a) financial comparisons, b) estimates and analyst recommendations, and c) rankings with accompanying data table. As we compare each metric, the best-performing company will be shaded green, while the worst-performing will be shaded yellow, which will later be tallied for the final ranking.

A) Financial Comparisons

Market Capitalization: While company size does not necessarily imply an advantage, and is thus not ranked, it is important as a denominator against which other financial data will be compared for ranking.

Growth: Since revenues and expenses can vary greatly from one season to another, growth is measured on a year-over-year quarterly basis, where Q1 of this year is compared to Q1 of the previous year, for example.

In the most recently reported quarter, CVS delivered the greatest trailing revenue growth year-over-year, where ESRX delivered the greatest trailing earnings growth. At the low end of the scale, CVS and ESRX delivered the least growth in opposite metrics.

Profitability: A company's margins are important in determining how much profit it generates from its sales. Operating margin indicates the percentage earned after operating costs, such as labor, materials, and overhead. Profit margin indicates the profit left over after operating costs plus all other costs, including debt, interest, taxes, and depreciation.

Of our three contestants, UNH enjoyed the widest profit and operating margins, while ESRX contended with the narrowest.

Management Effectiveness: Shareholders are keenly interested in management's ability to do more with what has been given to it. Management's effectiveness is measured by the returns generated from the assets under its control, and from the equity invested into the company by shareholders.

For their managerial performance, UNH's management team delivered the greatest returns on assets and equity, while ESRX's team delivered the smallest returns on both.

Earnings Per Share: Of all the metrics measuring a company's income, earnings per share is probably the most meaningful to shareholders, as this represents the value that the company is adding to each share outstanding. Since the number of shares outstanding varies from company to company, I prefer to convert EPS into a percentage of the current stock price to better determine where an investment could gain the most value.

Of the three companies here compared, UNH provides common stockholders with the greatest diluted earnings per share (DEPS) gain as a percentage of its current share price, while ESRX's DEPS over current stock price is lowest.

Share Price Value: Even if a company outperforms its peers on all the above metrics, however, investors may still shy away from its stock if its price is already trading too high. This is where the stock price relative to forward earnings and company book value come under scrutiny, as well as the stock price relative to earnings relative to earnings growth, known as the PEG ratio. Lower ratios indicate the stock price is currently trading at a cheaper price than its peers, and might thus be a bargain.

Among our three combatants, ESRX's stock is the cheapest relative to forward earnings, company book value, and 5-year PEG. At the overpriced end of the scale, CVS's stock is the most expensive relative to earnings, while UNH's is the priciest relative to company book and PEG.

B) Estimates and Analyst Recommendations

Of course, no matter how skilled we perceive ourselves to be at gauging a stock's prospects as an investment, we'd be wise to at least consider what professional analysts and the companies themselves are projecting - including estimated future earnings per share and the growth rate of those earnings, stock price targets, and buy/sell recommendations.

Earnings Estimates: To properly compare estimated future earnings per share across multiple companies, we would need to convert them into a percentage of their stocks' current prices.

Of our three specimens, ESRX offers the highest percentage of earnings over current stock price for all time periods, while CVS offers the lowest percentage in all periods.

Earnings Growth: For long-term investors, this metric is one of the most important to consider, as it denotes the percentage by which earnings are expected to grow or shrink as compared to earnings from corresponding periods a year prior.

For earnings growth, UNH offers the greatest growth in the current quarter, ESRX offers it next quarter, while CVS offers it beyond. At the low end of the spectrum, where CVS offers the slowest growth in the current quarter, ESRX offers it next year, while UNH offers it next quarter and over the next five years.

Price Targets: Like earnings estimates above, a company's stock price targets must also be converted into a percentage of its current price to properly compare multiple companies.

For their high, mean, and low price targets over the coming 12 months, analysts believe CVS's stock offers the least upside potential and least downside risk, where ESRX's offers the greatest upside and UNH's offers the least downside.

It must be noted, however, that CVS's stock is already trading below its low target. While this may mean increased potential for a sharp move upward, it may warrant a reassessment of future expectations.

Buy/Sell Recommendations: After all is said and done, perhaps the one gauge that sums it all up are analyst recommendations. These have been converted into the percentage of analysts recommending each level. However, I factor only the Strong Buy and Buy recommendations into the ranking. Hold, Underperform and Sell recommendations are not ranked, since they are determined after determining the winners of the Strong Buy and Buy categories, and would only be negating those winners of their duly earned titles.

Of our three contenders, CVS is best recommended with 9 strong buys and 13 buys, representing a combined 88% of its 25 analysts, followed by UNH with 8 strong buy and 10 buy ratings, representing a combined 78.26% of its 23 analysts, and lastly by ESRX with 6 strong buy and 9 buy recommendations, representing 60% of its 25 analysts.

C) Rankings

Having crunched all the numbers and compared all the projections, the time has come to tally up the wins and losses and rank our three competitors against one another.

In the table below, you will find all of the data considered above, plus a few others not reviewed. Here is where using a company's market cap as a denominator comes into play, as much of the data in the table has been converted into a percentage of market cap for a fair comparison.

The first- and last-placed companies are shaded. We then add together each company's finishes to determine its overall ranking, with first-place finishes counting as merits, while last-place finishes count as demerits.

And the winner is... everyone! For the first time in 238 comparisons, we have a three-way draw, implying no distinct advantage of any one company over the others. What investors need to do here is isolate the metrics that mean the most to them and pick accordingly.

For instance, value investors may opt for ESRX, which offers the cheapest stock price ratios of the three companies. Growth investors may opt for CVS, which offers the highest earnings growth over the current year, the next year, and the next five. While investors focused on superior company operations may opt for UNH, which offers the widest profit and operating margins, as well as the greatest returns on assets and equity.

With the rapid increases in medical insurance coverage to-date, along with the expected increases projected over the coming years, investors can expect the stock values of Health Care Plans companies to continue increasing as well. While there is no distinct winner in today's competition, we can confidently say that the winners here are all shareholders of the New 3 Largest Health Care Plans Companies.