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3 Health Insurance Stocks Poised to Beat on Earnings in Q3

Sapna Bagaria

The health insurance industry delivered a stellar operating performance in the first six months of 2019 with most players reporting higher top and the bottom-line numbers from the year-ago quarter as well as beating estimates on both counts.

An increase in membership and premiums was the main catalyst for top-line growth, leading to gains in the first two quarters of 2019. Medical cost management, better claims handling and cost-saving initiatives among others contributed to the bottom line.

Leading players including the likes of Humana, UnitedHealth Group Inc. UNH, Cigna and Anthem also upped their respective earnings guidance for 2019. This reflects the companies’ continued optimism on the operating environment.

Nevertheless, year to date, the health insurance industry has declined 9.7% against the Zacks S&P 500 composite’s rise of 17.7%. The industry’s decrease was due to investors’ supposed concern for various political uncertainties.

Factors to Influence Third-Quarter Earnings

Progress in Government Business: Medicare Advantage (MA) and Medicaid: Although MA remains one of the most attractive markets, it is underpenetrated and provides enough scope for expansion. These insurance plans are in huge demand from the baby boomers, which are rising by the day. Most health insurance giants, namely United Health, Humana, Aetna Anthem and Well Care Health have witnessed a secular uptrend in their MA business and the trend is expected to continue in the to-be-reported quarter.

Per The Centers for Medicare & Medicaid Services (CMS)  Medicaid expenditures will exceed $540 billion by 2025 of which nearly 60% is expected to be serviced by managed care as state Medicaid programs increasingly turn to health insurers to take responsibility for the care of their most complex and chronically ill beneficiaries.

This shift toward managed Medicaid presents a growth opportunity for the industry players. Medical enrollment historically (from 2013 to 2018) has augmented for UnitedHealth, Centene, Anthem, WellCare Health Plans and is likely to shoot up further.

Gains From Pharmacy Benefit Management Business: The healthcare sector witnessed a transition in recent years with a string of mergers between entities from the two major industries, such as Pharmacy Benefit Managers (PBM) and Health insurers.

The integration of PBMs and Payors started with UnitedHealth building its own PBM business (Optum Rx) and other insurers following suit.

Last year, Cigna acquired the PBM major Express Scripts. Also, Aetna was bought by another PBM major CVS while Anthem is developing its own PBM platform called IngenioRx. Further, Humana functions through its own in-house PBM Humana Pharmacy Solutions.

In the second quarter, revenues from the respective PBM businesses under UnitedHealth, CVS Health and Humana ascended 11.7%, 4.2% and 7%, respectively. Players expect a spurt in adjusted scripts, which should aid revenues from this line of business.  

Share Buybacks: Given the surplus capital resource available at their disposal, major health insurers have been actively repurchasing their shares. Except Cigna and CVS, other players inclusive of UnitedHealth, Anthem and Humana bought back shares, only to bump up the bottom line in turn. Given the fact that the share repurchase authorizations of most companies are still pending, we expect more buybacks in the ensuing quarters.  

We are thus upbeat about an overall positive performance from the sector in absence of any significant headwind.

Stocks to Bet on for Q3 Earnings Beat

Below we pick up three stocks that are likely to deliver a third-quarter positive earnings surprise.

These are the stocks with the perfect combination of a favorable Earnings ESP and a top Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold).You can see the complete list of today’s Zacks #1 Rank stocks here.

Our research shows that for stocks with this ideal mix, chances of a positive earnings surprise are as high as 70%.

Notably, Earnings ESP provides the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Cigna Corp. CI has an Earnings ESP of +0.25% and a Zacks Rank #2. For the to-be-reported quarter, the company’s earnings are expected to grow 13.8%. The stock surpassed estimates in three of the last four quarters, the average positive surprise being 7.02%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Anthem Inc. ANTM has an Earnings ESP of +4.31% and a Zacks Rank of 2. For the quarter to be reported, the company’s earnings are estimated to jump 26.5%. The stock outpaced estimates over the trailing four quarters, the average being 4.57%.

Humana Inc. HUM has an Earnings ESP of +1.77% and is Zacks #2 Ranked. For the impending quarterly results, earnings for the company are anticipated to inch up 0.22%.  The stock trumped earnings estimates in all the preceding four quarters, the average being 7.79%.

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