5 Healthcare Profit Kings That Will Thrive Over The Long-Term

Includes: AET, CI, ESRX, HUM, UNH
by: Vatalyst

Which stocks will thrive in the face of healthcare reform? Which will struggle? I've researched five highly profitable healthcare stocks that I believe can navigate government boondoggles in the healthcare space and thrive over the long term. As always, please use my analysis as a starting point for your own due diligence.

Aetna Inc. (NYSE:AET) – As one of the larger insurance companies, many consumers are familiar with AET and its products. Many investors are also familiar with the company as an investment. With a beta of 0.98, the stock is roughly as volatile as the market. Aetna does offer a dividend of $0.60, which is a yield of 1.50%. The company shows profitable earnings per share of $4.72 which gives it a price to earnings ratio of 8.3. This is slightly under the industry average of 11.1, and more than half the S&P 500 at 17.3. Looking at the competitors Cigna Corporations (NYSE:CI) and Unitedhealth Group, Inc. (NYSE:UNH), both discussed below, Aetna is right in the middle of the pack. Financially speaking, Aetna has low debt and is profitable, with a total debt to equity ratio of 0.42 and a return on equity of 17.40%. Thus, Aetna is a solid bet going forward.

Cigna Corp. (CI) – Similar to Aetna, Cigna has a beta of 0.91, making it roughly as volatile as the market. While Cigna does give a dividend to investors, it is not a very high one. Currently the stock offers a yield of 0.10% which is an annual dividend of $0.04. The company does however have very strong earnings with an earnings per share of $5.50. This gives Cigna a price-to-earnings ratio of 7.9. With the retained earnings, the company can fuel its current growth strategy. However, is Cigna paying too much for growth? Recently CI made another acquisition in the purchase of HealthSpring Inc. (NYSE:HS) and did so by paying a 37% premium for the company. Compared to its competitors Aetna and UnitedHealthcare, Cigna has the lowest market capitalization of $11.53 billion compared to Aetna’s $14.36 billion and UnitedHealthcare’s $50.21 billion, which, in the insurance industry means Cigna is a candidate for consolidation. Financially, the company has a low debt with a debt to equity ratio of 0.43 and is able to return a profit with a return on equity of 21.30%. With the number of acquisitions the company has done to expand globally, this may be a stock with earnings on the rise.

Express Scripts, Inc. (NASDAQ:ESRX) – Express Scripts is the only company in this analysis that deals primarily with the prescription side of health insurance. However, that doesn’t mean it’s one stock that shouldn’t be considered. This stock is slightly more volatile than the market, with a beta of 1.09, and currently does not offer a dividend to investors. Express Scripts does have a nice earnings per share of $2.55 which gives the company a price-to-earnings ratio of 17.3. Although this is higher than the rest of the industry average of 11.1, it has the same ratio as the S&P 500. Even though the stock has a higher ratio than the industry, Jim Cramer still feels that this stock is a good one as he recently rated it a Buy. Other analysts seem to agree that the stock has room to grow, with a mean target price in the upper $50s at $57.28. Currently, Express Scripts is attempting to purchase Medco Health Solutions (NYSE:MHS) for $29 billion dollars. The U.S. Federal Trade Commission is reviewing the attempted acquisition to make sure no antitrust laws are broken in this consolidation of the industry.

Humana, Inc. (NYSE:HUM) – With a lower beta than other companies on this list at 0.87, Humana is less volatile than its competitors, as well as the market. The company also offers a higher annual dividend which is $1, annually, and a 1.20% dividend yield. Humana has attractive numbers with its earnings per share at $7.88. This gives the company a price to earnings ratio of 10.6, which is right in line of the industry average of 11.1. Comparing Humana to the competitors already mentioned above, it has one of the lower market caps, at $14.33 billion. To further add to the company’s profitability, Humana’s 3rd quarter earnings were well above expectations as earnings per share were up 13%. This is due to light "usage" as well as more members. Just as Cigna is using acquisitions to increase its growth globally, Humana agreed to acquire privately held MD Care to expand its presence in California. The purchase will help Humana expand its Medicare plans for the elderly in the state. This could be seen as a strong acquisition for the company, which is already profitable; it has a return on equity of 16.90% and return on investment of 13.90%.

UnitedHealth Group, Inc. (UNH) – The final stock on the list also has the highest market cap of its competitors, with a total of $50.21 billion. It also has the lowest beta of any stock on the list, at 0.84. The company’s dividend is $0.65 annually, which is a yield of 1.30%. The price to earnings ratio of 10.3 is still lower than the industry as a whole, at 11.1. Over the past decade, UnitedHealth has returned 200% to investors. Over this period, earnings per share grew at an average of 24%. However, the price to earnings ratio has also dropped over the same period. This could be because the shares were either previously overpriced, or it could be due to the uncertainty of the industry with healthcare reform. In either case, UnitedHealth still has been able to have a return on equity of 18% and a return on investment of 13.40%, helping make it one of the more attractive stocks on this list.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.