Ahead of the U.S. 2020 presidential election, some investors are concerned that discussions regarding healthcare reform could take a toll on both share prices and valuations. That being said, one analyst believes that compelling investment opportunities can still be found within the managed care space. Managed care refers to various healthcare plans that try to reduce costs by controlling the type and level of services provided.
Deutsche Bank’s George Hill just initiated coverage on 3 healthcare stocks, giving each a Buy rating based on their “attractive” potential for growth on September 11.
Using the TipRanks Stock Comparison tool, we compared how the stocks measure up against each other based on year-to-date gain, analyst consensus as well as average analyst price target. Each of these stocks has amassed significant support from other Wall Street analysts with a “Strong Buy” analyst consensus. This is based on the last three months’ worth of ratings from the rest of the Street.
Let’s dive in.
Out of the three healthcare stocks on our list, Hill cites CVS as his top pick based on its level of diversification. While shares are down 2% year-to-date, CVS has slowly but surely been working its way back up gaining 18% in the last three months. With all that the drug store and pharmacy chain has going for it, Hill sees even more growth on the way.
It has about 10,000 pharmacies across the U.S. and plans to open 1,500 HealthHub stores by the end of 2021. He also highlights its integrated care delivery, which can improve beneficiary care as well as cut costs.
That being said, a significant portion of its revenue is generated from its non-managed care organization (MCO) segments. CVS’ non-MCO businesses include the largest PBM, the second-largest pharmacy chain, long-term care and other services.
While some investors originally expressed concerns regarding its $70 billion acquisition of health insurer Aetna in 2018, management has tried to mitigate any fears. On June 4, the company conveyed that once the two companies are fully integrated, it could see low-double digit percent earnings growth by 2022.
Hill argues that the company is poised to meet its guidance based on its business strategy. “We see the company as well positioned to deliver on a vertical integration care delivery strategy, allowing the company to take share and generate positive earnings surprise. We also see the valuation of CVS shares as highly compelling and capturing potential execution and integration risks,” he explained. As a result, the three-star analyst initiated coverage with a Buy and set a $91 price target, suggesting 42% upside.
All in all, the rest of the Street takes a similar position. CVS boasts a ‘Strong Buy’ analyst consensus and a $72 average price target, indicating 13% upside potential, the lowest on the list.
Recently, Anthem has attracted attention for its new PBM strategy. The company announced in March that its PBM, IngenioRX, will be more transparent and customer-friendly, with the new PBM passing along rebates to pharmacy customers. Traditional PBMs get rebate payments from drug manufacturers in exchange for placing medications on PBMs’ lists of covered drugs, or formularies. According to management, this new strategy could reduce costs and simplify services.
It should be noted that IngenioRx is the product of its partnership with CVS that involves a five-year agreement signed back in 2017. CVS has its own Caremark PBM, and only processes claims and handles tasks related to prescription fulfillment for IngenioRX. Anthem has full control over clinical strategy and decides which drugs are covered.
In addition to revamping its PBM strategy, its 2018 acquisitions of Aspire Health and America’s 1st Choice as well as HealthSun in 2017 are expected to drive substantial Medicare Advantage growth. Medicare Advantage plans are an alternative to original medicare that let beneficiaries choose to get their coverage through private insurance companies that contract with Medicare.
While all of the above supports a strong long-term growth narrative, Hill notes that there are some risks associated with Anthem. “While execution has been strong recently, we see some implementation risk on the company’s PBM strategy, risk to the company’s Medicare Advantage growth targets, less exposure to faster-growing segments of the market and a rich relative valuation,” he stated. Nonetheless, the potential reward outweighs this risk. With his coverage initiation, Hill set a $323 price target which implies 28% upside.
With 7 Buy ratings vs no Holds or Sells received in the last three months, the word on the Street is that ANTM is a ‘Strong Buy’. Its $345 average price target demonstrates the potential for 36% upside, the highest on our list.
Some investors have expressed concerns that the health insurance company is overexposed in both the PBM and commercial business space. In December 2018, CI finalized its $67 billion merger with PBM Express Scripts in order to expand its reach within the sector.
The merger could be a problem for CI as regulations have been proposed that would impair the PBM business model. This poses a major threat to CI as its primary non-MCO revenue comes from large PBMs. While no legislation has been passed yet, there is always a possibility that this could change.
A significant portion of CI’s revenue is also generated from its commercial products. The commercial MCO space includes risk-bearing insurance and administrative services only (ASO). Hill states that while this space can be more profitable, it is slower growing than the government-pay business as the commercial business is largely stagnant.
While acknowledging that Cigna is behind the curve in terms of its reach within the government-pay space, he still believes the stock is poised to soar. “We view Cigna’s PBM segment earnings as not having significant short-term earnings risk and the company’s diversified earnings stream as undeserving of the steep discount applied to the shares in the wake of the Express Scripts merger,” he explained. As a result, the analyst initiated coverage with a Buy and set a $207 price target. The price target reflects his confidence in CI’s ability to surge 29% over the next twelve months.
Wall Street seems to agree with Hill. CI has only been assigned Buy ratings in the last three months. Its average price target of $214 indicates 33% upside potential, falling just short of ANTM’s.