Investing in health insurers today amounts to a bet against the Medicare for All proposal championed by Sen. Bernie Sanders and other Democrats running for president, which could eliminate a role for private insurers in the medical-care system.
Yes, the stocks have been battered. But given the long odds of an industry-killing plan becoming law, shares of the leading insurers— UnitedHealth Group (UNH), Anthem (ANTM), Cigna (CI), Humana (HUM), and CVS Health (CVS)—look appealing.
The stocks trade for an average of just 12 times projected 2019 earnings. And UnitedHealth, Anthem, and Humana already are generating double-digit growth in earnings per share. “Anyone who has a 12- to 18-month horizon and a value mind-set should be buying,” says Ana Gupte, an analyst with SVBLeerink. She puts only a “generous” 5% chance of Medicare for All getting enacted.
Patience is required because the insurers could be under a cloud until the 2020 presidential election—unless a Democratic front-runner emerges and distances himself or herself from the Medicare proposal.
Even if that doesn’t happen—and if Democrats sweep the White House and both houses of Congress in 2020—any major overhaul of health care would probably not happen until 2023. From now until then, the health insurers would be producing significant earnings, Gupte maintains.
In any case, it isn’t going to be easy for the Democrats to win everything in 2020. President Donald Trump is seen as having close to a 50% chance of being re-elected, and the odds of Democrats winning control of the Senate, which would be crucial for passage of Medicare for All, are less than one in three, according to Dan Clifton, Washington analyst at Strategas Research Partners.
Ross Margolies, founder and chief investment officer of Stelliam Investment Management, compares Medicare for All to another progressive proposal, the Green New Deal: “It’s very aspirational, but there’s no way to implement it.”
He’s bullish on industry leader UnitedHealth. “It’s one of the great growth companies selling at a value multiple,” Margolies argues. UnitedHealth recently reported a 23% rise in adjusted first-quarter earnings, to $3.73 a share. It trades for 15 times projected 2019 profits of $14.70 a share—a reasonable valuation, given longer-term expected annual earnings growth of 13% to 16% a share.
Gupte favors Anthem, Humana, and UnitedHealth, which are less leveraged than CVS and Cigna. Both completed major debt-financed acquisitions last year. CVS bought Aetna; Cigna purchased Express Scripts.
Managed care’s clean bill of health
How the big health insurance companies stack up.
|Company / Ticker||YTD Change||2019E EPS||2020E EPS||2019E P/E||2020E P/E||Dividend Yield||2018 Operating Profit Margin||Market Value (bil)|
|Anthem / ANTM||-9%||$19.16||$22.76||12.5||10.5||1.34%||6.3%||$62|
|Cigna / CI||-22||16.49||18.50||9.0||8.1||0.03||8.6||57|
|CVS Health / CVS||-20||6.84||7.33||7.7||7.2||3.80||2.1||68|
|Humana / HUM||-16||17.44||19.28||13.8||12.5||0.91||5.5||33|
|UnitedHealth Group / UNH||-11||14.70||16.62||15.1||13.3||1.62||7.7||213|
Humana, at $240, trades for 14 times projected 2019 earnings. It’s a play on the growth of the Medicare Advantage program, a managed-care alternative to traditional Medicare. Humana is a top pick of Barclays analyst Steve Valiquette, who sees it benefiting from continued expansion of Medicare Advantage. He has an Overweight rating and a $327 price target on the stock.
Anthem is a self-help story. Its well-regarded CEO of the past 18 months, Gail Boudreaux, is overhauling what had been a sleepy group of Blue Cross Blue Shield insurers, while increasing margins through a new pharmacy-benefit management arrangement and other measures. Anthem shares, at $240, trade for 12 times estimated 2019 earnings. That looks cheap considering 20% projected growth in profits per share in both 2019 and 2020 and 12% to 15% annual gains thereafter.
The health insurers were down an average of 8% last week, making them one of the worst-performing industry groups. The selloff came as Sanders’ standing in the polls rose and after he received a surprisingly favorable response for Medicare for All at what many thought might be an unfriendly Fox News town hall.
It’s worth recalling, however, that the Affordable Care Act—Obamacare—proved divisive and barely cleared the Senate a decade ago. That program merely expanded the scope of coverage under existing private and public health-care plans.
That’s nothing compared with Medicare for All, which in an extreme form would force the 175 million Americans with employer-sponsored insurance to switch to public plans. It could also end Medicare Advantage. That popular, privately run program handles health care for 22 million senior citizens, a third of all Medicare recipients.
The industry had largely stayed quiet on Medicare for All until Tuesday, when UnitedHealth CEO David Wichmann blasted the idea on an earnings call.
“The wholesale disruption of American health care being discussed in some of the proposals,” he said, “would surely jeopardize the relationship that people have with their doctors, destabilize the nation’s health-care system, and limit the ability of clinicians to practice medicine at their best.”
UnitedHealth shares tumbled 4% on Tuesday despite strong earnings. Some blamed Wichmann for bringing up the issue. But if the industry isn’t going to defend itself, who will?
Sanders didn’t let up. The Vermont senator tweeted that UnitedHealth’s “greed is going to end” when “we are in the White House.”
But investors should tune out Sanders and his tweets. Despite the noise, Medicare for All looks like a long shot.
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