Amerigroup Buyout Resuscitates Healthcare ETFs

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Healthcare exchange traded funds defied the market's weakness Monday on news that health-insurance giantWellPoint ( WLP ) agreed to buy outAmerigroup ( AGP ). The deal valued one of the largest players in Medicaid at $4.9 billion or about $92 a share. Amerigroup shares shot up 38% to close at 88.79.

IShares Dow Jones U.S. Healthcare Provider ( IHF ) gapped up 2.14% to 65.02. The ETF appears to be forming a cup-with-handle pattern with a 66.18 potential buy point.

It has a middle-of-the-road IBD Relative Strength Rating of 57 but a strong Accumulation/Distribution Rating of B-. That means its price performance is outpacing 57% of the market and institutions are buying more shares than selling.


IHF has 7% of its assets invested in WellPoint and 2% in Amerigroup. Its largest holdings areUnitedHealth Group ( UNH ), accounting for 14% of assets, andExpress Scripts Holdings ( ESRX ), with 12%.

The deal is estimated to save WellPoint and Amerigroup $50 million in 2013 from combined operations and up to $125 million by 2016.

The buyout is set to close in the first quarter next year, pending regulatory approval. Upon completion, WellP oint will be the largest Medicaid managed-care provider, with 4.5 million subscribers in 19 states.

As the largest health insurer, it covers 33.5 million members under UniCare, Blue Cross and Blue Shield plans. UnitedHealth, the largest-Medicaid provider currently, covers 3.6 million people.

Medicaid serves low-income families and some disabled people and is jointly covered by states and the federal government.

The buyout will expand WellPoint's reach in the fast-growing Medicaid market, analysts said.

"WellPoint has not had much success on its own in the past when it comes to winning Medicaid contracts," Jefferies equity analyst David Windley and his colleagues wrote in a client note. "Amerigroup's experience in this arena should elevate this success rate." They rated WellPoint shares as "hold."

WellPoint "recognizes the growth opportunity in the government space, as states continue to face significant budget challenges, while managed care is still underpenetrated," Raymond James analysts Michael Baker and Cathy Chen wrote to clients. "WellPoint expects spending on managed care in Medicaid to grow by about $100 billion by the end of 2014."

Amerigroup's membership grew an average of 4% annually between 2007 and 2011 while revenues grew 13% over the same period.

Other government-sponsored healthcare program providers,WellCare Health Plans (WCG),Molina Healthcare (MOH) and Centene (CNC), jumped 18% to 20% on speculation they could be the next buyout targets. Potential suitors include large, diversified providers with a small reach in Medicaid such asAetna (AET),Cigna (CI) andHumana (HUM), say Baker and Chen.

Medicaid managed-care providers will likely to be among the biggest beneficiaries of the Patient Protection and Affordable Care Act (PPACA), says David Kremp, an analyst at Morningstar.

Informally known as Obama-Care, the law passed in March 2010 requires adults not covered by an employer- or government-sponsored health plan to buy insurance or pay a tax. Kremp estimates that most of the 17 million new Medicaid enrollees will end up in private Medicaid plans.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , ETFs

Referenced Stocks: AGP , ESRX , IHF , UNH , WLP

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