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4 HMO Stocks in Focus as Legislative, Operating Trends Improve

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·9 min read
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Changed political climate with Joe Biden at the presidential office is one of the major positives for the health insurance industry. Other factors, such as aging U.S population, rife consolidations, investments in technology et al are expected to drive growth for the HMO players.

Companies with the likes of UnitedHealth Group Inc. (UNH), Anthem Inc. (ANTM), Cigna Corp. (CI) and Humana Inc. (HUM) stand to gain maximum, given their scale, size, a wide bouquet of products and services, and a strong balance sheet

About the Industry

The  Health Maintenance Organization (HMO) industry comprises entities (either private or public) that take care of the basic and supplemental health services of its subscribers. Companies in this space primarily assume the risks involved and assign premiums to health and medical insurance policies. Industry participants also provide administrative and managed-care services for self-funded insurance.

Services are generally provided by a network of approved care providers (called in-network), which include primary care physicians, clinical facilities, hospitals and specialists. However, out-of-network exceptions are made during emergencies or when it is medically necessary. Health insurance plans can be availed of by ways like private purchase, social insurance or social welfare programs, such as the government-funded Medicare and Medicaid.

Factors Shaping the Future of HMO Industry

Biden’s Support for ACA: Although the ACA (enacted in March 2010) placed many restrictions on health insurers, it was one of the biggest positives for them. The act aimed to bring more and more Americans under insurance coverage and make healthcare accessible for all. Notably, the expansion in coverage brought in more customers for health insurers and aided growth.

The ACA, however, came under attack by Trump, the successor of Obama. During his tenure, major provisions (most important individual mandate) of the ACA were attacked to make it dysfunctional.. But with Biden at the office now and his efforts to reinstate ACA to its former glory, things are looking up for the health insurance industry.

Soon after being at the helm, Biden allowed a Special Open Enrollment window on Feb 15, and further extended the same to Aug 15. This gave Americans another chance to buy an insurance coverage online on health exchanges. The president also rolled out subsidies to make insurance more affordable. Per last week’s statistics, more than 1 million Americans signed up for individual health plans on health exchanges.

Health insurers with the likes of Centene and Molina already reported growth in membership from the special enrollment period, which in turn, prompted them to also raise their membership guidance for 2021. This should translate further into healthier top lines. Per insurers, 2021 might be the best selling year for them.

Biden’s other healthcare-related ideas, such as lowering the Medicare eligibility age to 60 from 65 and making the presently-on-offer subsidies permanent will expand the health coverage net. With greater number of people getting insured, higher will be the business wins for health insurers, which indicate a long-term boon for the industry.

Growing Senior Population: As life expectancy continues to rise in the United States and seniors account for a higher percentage of the total population, overall demand for health insurance among the aged will soar. The expanding silver years buoy demand for Medicare Advantage (MA), the private version of the government Medicare program. The continued decrease in member premiums, new benefits and less attractive medigap options are all contributing to Medicare Advantage growth.

Telehealth facilities are also being provided under the MA (Medicare Advantage) plans with the COVID-19 outbreak. With 10,000 boomers aging into the program every day and beneficiaries being offered a larger selection of plans each new season, MA enrollment growth projections will only surge.

This will continue to take on a larger role in the Medicare program over the next decade. Medicare Advantage enrollment estimates by The Congressional Budget Office (CBO) predict a continued improvement over the next decade with Medicare Advantage enrollment plan covering about 47% of the beneficiaries by 2029.

Increased Adoption of Technology: The industry also joined the movement of digital revolution by embracing cutting-edge technology for operational use. It was slow on this transition but the coronavirus pandemic accelerated the process.

Companies are using chatbots and AI-based voice, assistants, augmented reality (AR), virtual reality (VR) and mixed reality (MR), mobile-based apps, robots, cloud computing, analytics among other technologies to optimize health care delivery and workflow while minimizing wasted costs. This should lead to enhanced operational efficiency and better customer experience. Insurers who can bridge the physical-virtual chasm will be the frontrunners in the industry.  

Industry player UnitedHealth leads the pack with a separate unit named OptumInsight, which offers software, data analytics and related services to health care providers. Recently, it bought Change Healthcare, a health technology firm to fortify its health information and technology business.

Zacks Industry Rank Indicates Bright Prospects

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates rosy prospects in the near term.

The Zacks Medical-HMO, which is a 15-stock group within the broader Zacks Medical sector, currently carries a Zacks Industry Rank #69, which places it in the top 27% of 251 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the top 27% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate.

Before we present a few HMO stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and its valuation picture.

Industry Outperformed the Sector but Lagged the S&P 500

The Zacks Medical-HMO industry has underperformed the Zacks S&P 500 composite but has fared better than its own sector over the past year.

We see that the stocks in this industry have collectively rallied 33.8% over the past year compared with the Zacks S&P 500 composite’s rise of 43.22%. Meanwhile, the Zacks Medical sector has gained 1.7%.

HMO Industry’s Current Valuation

On the basis of the forward 12-month price-to-earnings (P/E) ratio, which is commonly used for valuing HMO stocks, the industry is currently trading at 18.95X compared with the S&P 500’s 21.87X and the sector’s 22.5X.

Over the past five years, the industry has traded as high as 20.58X, as low as 12.48X and at a median of 16.19X.

4 HMO Stocks to Keep Tabs on

Below we select four stocks. each of which carries a Zacks Rank #3 (Hold) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

UnitedHealth Group Inc.: The company’s top line is bolstered by new deals, renewed agreements and an expansion of service offerings. Its numerous acquisitions augur well for its inorganic growth profile. Extension of the company’s health services segment provides significant diversification benefits.

UnitedHealth remains well poised to benefit from its strong government business, comprising both Medicaid and Medicare Advantage. A solid balance sheet and a consistent cash flow generation not only encourage investments in business but also add shareholder value.

The company delivered an earnings surprise of 20.21% in the trailing four quarters, on average. The expected long-term earnings growth rate is pegged at 12.8%. The stock has seen the Zacks Consensus Estimate for current-year earnings being revised 2% upward over the past 30 days.

Anthem Inc.’s prudent acquisitions and collaborations complement its inorganic growth story and help it boost Medicare Advantage growth. Its increasing top line, driven by the premium rate increase and higher membership, paves the way for long-term growth. Its solid guidance impresses.

It witnessed a rise in usage of its virtual care services, which in turn, poises Anthem well for long-term growth, courtesy of surging demand for telemedicine in behavioral health amid the COVID-19 pandemic. Nevertheless, its strong capital position enabled it to undertake shareholder-friendly moves via buybacks and dividend payments.

The company delivered an earnings surprise of 2.47% in the trailing four quarters, on average.  The expected long-term earnings growth rate stands at 12.7%. The stock has seen the Zacks Consensus Estimate for current-year earnings being revised 1.7% upward over the past 30 days.

Cigna Corp.: The company’s acquisition of Express Scripts bodes well for the long haul. It divested its Group Life and Disability insurance business to reduce the debt level and streamline its operations. Its expanding international business provides diversification.

Operating profitability achieved by a controlled medical care cost and containment of other operating costs is steadily aiding the company’s bottom line. Increasing membership is another positive for Cigna. The company’s strong capital position coupled with solid cash-generation abilities leads to investment in business.

The company delivered an earnings surprise of 5.43% in the trailing four quarters, on average.  The expected long-term earnings growth rate is pegged at 11.5%. The stock has seen the Zacks Consensus Estimate for current-year earnings move 0.2% north over the past seven days.

Humana is well-poised for growth on the back of a strong Medicare business, which has been performing well for several quarters. Acquisitions and alliances also place it well for growth. Its 2021 guidance impresses too. Moreover, it has been deploying excess capital for the past many years on its balance sheet strength. Strong operating cash flows are an added advantage

The company delivered an earnings surprise of 9.42% in the trailing four quarters, on average.  The expected long-term earnings growth rate is pegged at 13.2%.

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UnitedHealth Group Incorporated (UNH) : Free Stock Analysis Report
 
Humana Inc. (HUM) : Free Stock Analysis Report
 
Cigna Corporation (CI) : Free Stock Analysis Report
 
Anthem, Inc. (ANTM) : Free Stock Analysis Report
 
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