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Centene (CNC) vs. Humana (HUM): Which is Better-Positioned?

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Zacks Equity Research
·5 min read
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Companies in the health insurance space are well-poised for growth on the back of solid premium revenues, strong Medicare and Medicaid businesses, rising enrolment, state-based contracts and strategic measures. The healthy 2021 guidances should also instill investors’ confidence in the stock.

It should be also noted that the pandemic provided some relief to insurers’ Medical Loss Ratio (MLR), which is the ratio of premiums spent on claims. With maximum hospitals postponing the elective procedures and surgeries, it positively impacted the MLR of health insurers in the form of lower claim outgo. However, things are now going back to normalcy, which means that the effect of MLR will no longer be there.

Moreover, President Joe Biden's health care plan will build on Obamacare. The new plan will include some of the features of the Affordable Care Act and exclude the rest. Biden will protect the Affordable Care Act from the attacks of Congressional Republicans. The plan is expected to give Americans more choices while reducing healthcare costs for them. It will expand coverage to low-income groups and surely impact the industry players.

Other factors leading the industry are increasing contribution from complementary businesses, product modifications, expansion of international operations, better claims handling, cost management, technological investment and upgrade, mergers and acquisitions, and healthy balance sheets. Some companies are also gaining traction from high demand for telehealth services. Notably, companies like Anthem, Inc. ANTM are capitalizing on virtual care offerings.

Other industry players like Magellan Health, Inc. MGLN are streamlining their business. The company divested its Magellan Complete Care (MCC) business to Molina Healthcare. The sale eliminates the risk involved in the company’s execution of its MCC profitability improvement initiatives and allows the leadership team to focus on the remaining businesses, which provide high returns.

The industry is steadily gaining attention from investors owing to demand for value-based health plans and higher number of baby boomers.

The overall bullish scenario makes us believe that growth will be consistent in this industry, which should boost prospects of companies with strong business fundamentals. The Zacks HMO industry carries a Zacks Industry Rank within the top 44% (112 of 254).

Against this backdrop, let’s look at the two leading health insurers, namely Centene Corporation CNC and Humana Inc. HUM with their respective market capitalization of $35.99 billion and $52 billion. Each stock currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

In the past year, Humana and Centene have gained 57.4% and 15.5%, respectively. The industry has rallied 50.2% in the same time frame compared with the S&P 500 Index’s 66.9% increase.


Now let’s analyze certain other parameters to find out which company is better placed.

Earnings Surprise History

A stock’s earnings surprise track helps investors get an idea about its performance in the previous quarters.

Humana managed to pull off average four-quarter beat of 10.72%, beating the consensus mark in the trailing four quarters. Earnings of Centene managed to beat the Zacks Consensus Estimate in two of the trailing four quarters (while missing the mark in the other two), the average surprise being 4.34%. This clearly proves that the reading of Humana has an edge over Centene here.

Return on Equity

Return on equity is a profitability measure, which accounts for profits generated on shareholders’ equity. Hence, higher ROE reflects the company’s efficiency in using shareholders’ funds and is preferred by all equity investors.

The ROE of 17.7% for Humana compares favorably with Centene’s ROE of 11.5%.

Valuation

Price-to-earnings value is one of the multiples used for valuing health insurers. Compared with the health insurance industry’s forward 12 month P/E ratio of 16.94, Centene is undervalued with a reading of 11.63 while Humana’s shares are expensive with a P/E ratio of 18.14.

Debt-to-Equity

Both companies’ debt-to-equity ratio compares with the industry average of 58.6. However, Humana’s leverage ratio of 48.5 betters Centene’s ratio of 64.8. Therefore, Humana is at an advantage over Centene on this front.

Estimate Movement

For 2021, the Zacks Consensus Estimate for Centene has moved 0.4% north to $5.19 in the past 30 days while the same for Humana has been revised 0.1% downward to $21.68.

Bottom Line

Our comparative analysis shows that Humana is better-positioned than Centene with respect to price performance, earnings surprise, return on equity and leverage. Meanwhile, Centene scores higher in terms of valuation and estimate revision. As the scale is tilted in favor of Humana, the stock discernibly makes a more promising investment proposition.

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