AET vs. HCA: Which Stock is Poised for Better Q4 Earnings?
Fourth-quarter earnings have already crossed the halfway mark. As of Jan 26, 26% S&P 500 companies reported results with strong earnings numbers and 24% of them are scheduled to release this week.
Per the latest Earnings Preview, total earnings for the 133 S&P 500 members that have reported results already are up 12.3% year over year on 8.8% higher revenues, with 81.2% beating EPS estimates and 78.9% beating revenue estimates. About 65.4% of the companies have surpassed both EPS and revenue estimates.
Medical Sector Trends
The medical sector has been in the limelight ever since Donald Trump became the President. Trump’s intention to repeal and replace the Affordable Care Act (ACA), also known as Obamacare, has resulted in an uncertain future for the whole sector. As a result, the medical stocks continue to be in focus.
The U.S. healthcare industry substantially benefits from the strong membership base supported by medicaid expansion under ACA. Aggressive inorganic strategies have helped the players achieve fast-paced growth. In addition, new product launches, expansion into ancillary businesses, business diversification, cost control efforts, increased operating efficiencies and a strong capital position are expected to add to the top line and bottom-line growth for most of the players.
However, medical stocks face threats like the rising level of bad debt, demand for increasing investments in technological innovation, integration cost related to acquisitions and high interest expenses on debt-funded acquisitions. In addition, higher medical costs, public exchange woes, stiff competition, stringent regulations and compliance costs were also a drag. These are likely to put pressure on the bottom line.
Stocks to Compare
Let’s take a sneak peek into two Medical sector stocks — Aetna Inc. AET and HCA Healthcare, Inc HCA — that are set to report their quarterly earnings on Jan 30, before the market opens.
Aetna is an American managed health care company, engaged in selling traditional and consumer-directed health care insurance plans and related services. It is expected to be acquired by CVS Health in the second half of 2018, per a definitive merger agreement. On the other hand, HCA Healthcare, through its subsidiaries, provides health care services in the United States and England.
Here are some companies from the medical sector that are likely to beat on earnings in the fourth quarter.
Centene Corp. CNC has an Earnings ESP of +1.24% and a a Zacks Rank #2 (Buy)The company is set to report earnings on Feb 6. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Anthem Inc. ANTM has an Earnings ESP of +1.29% and a Zacks Rank #2. The company is set to report financial results on Jan 31.
Q4 Expectations From Aetna
In the quarter, we expect Aetna to witness a decline in revenues due to lower premiums in its Health Care segment, including lower membership in its ACA-compliant individual and small group products, and the temporary suspension of the health insurer fee in 2017.
Revenues are also expected to remain under pressure in the fourth quarter owing to the sale of its domestic group life insurance, group disability insurance and absence of management business lines; the previously disclosed Medicaid contract termination; exits from individual Commercial products and continued repositioning of its ACA- compliant small group Commercial products.
Management has also reduced its 2017 revenue guidance to approximately $60.5 billion from $61 billion. The Zacks Consensus Estimate for revenues from the Health Care segment for the fourth quarter is $14.5 billion, down 3.7% year over year.
Medical benefit ratio, a metric used to measure medical costs as a percentage of premium revenues, is expected to increase in the fourth quarter, due to an unfavorable performance of its Individual Commercial products.
The company projects an increase in the ratio driven primarily by the suspension of the health insurer fee and experience rating pressure in the Group Commercial and Group Medicare Advantage products, partially offset by projected improvement in its Individual Commercial Insured products. The Zacks Consensus Estimate for the same is 85%, up from 82% in the year-ago quarter.
The Zacks Consensus Estimate for total medical membership, one of the key drivers of revenues, is 22.18 million, down 4% year over year. We expect medical membership to suffer from a decline in the company’s ACA-compliant individual and small group and Medicaid products. The decrease is likely to be partially offset by increase in its Commercial ASC, International Commercial Insured and Medicare Insured products.
The company's focus on managing costs will keep a check on its operating expenses.
Share repurchases made by the company in the fourth quarter will help boost its earnings.
Aetna has the right combination of two main ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) for an earnings beat. Notably, the Earnings ESP for Aetna is +0.27%.
You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Aetna Inc. Price and EPS Surprise
Aetna Inc. Price and EPS Surprise | Aetna Inc. Quote
Q4 Expectations From HCA Healthcare
The company’s revenues have been rising over the past few years on the back of accretive acquisition of other hospitals. Continuing the trend, patient admissions are expected to grow further in the fourth quarter, driving the top line. The Zacks Consensus Estimate for total admissions, one of the key revenue drivers, (representing the total number of patients admitted to the company’s hospitals and is a general measure of inpatient volume) is 497,000, reflecting year-over-year growth of 4.6%. The Zacks Consensus Estimate for in patient revenues per admission is pegged at $13,433, up 2.5% year over year.
The company has been deploying capital in terms of share repurchases to enhance investors’ value. Share buyback programs taken up during the fourth quarter are likely to favor the bottom line, limiting the share count.
However, the company’s fourth-quarter results are expected to suffer from the industry-wide softness in volumes. Factors like payor initiatives to move volumes away from hospitals, rising deductibles and prevalence of high deductible health plans, and increased proportion of hospital care to be paid by consumers are likely to lower volumes.
Operating expenses per equivalent admission are also likely to increase in the fourth quarter with a rise in admissions.
However, our proven model does not conclusively show that HCA Healthcare will beat on earnings this quarter. This is because, despite carrying a favorable Zacks Rank #3, its Earnings ESP of -0.20% makes the prediction inconclusive.
HCA Holdings, Inc. Price and EPS Surprise
HCA Holdings, Inc. Price and EPS Surprise | HCA Holdings, Inc. Quote
Conclusion
Per our proven model, despite chances of a decline in its revenue base, Aetna is poised better for fourth-quarter earnings compared to HCA Healthcare.
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Aetna Inc. (AET) : Free Stock Analysis Report
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