Health care – or to be more precise, health insurance – has been a major headline grabber for years now, and especially so since passage of the Affordable Care Act (ACA) in 2010. There were serious questions, in the public square and the halls of Congress, about the fate of the health insurance providers. That aspect was played down after passage of the bill, so now may be a good time to see how the issue played out. Looking back, it’s clear that for the major players, at least, the ACA has not had deleterious long-term effects
For the health insurance companies, this has been more than a matter of political hot potato – it’s profit and loss, success and failure. Let’s dig into TipRanks database and see how two of the health insurance industry’s biggest players are faring in today’s climate.
A Banner Year for Anthem
Known as WellPoint until 2014, Anthem, Inc. (ANTM – Research Report) is the second largest health insurance provider in the United States. The company has been attempting to merge with Cigna (CI), the fifth largest provider, since 2016 in an effort to carve out larger market share, but the transaction has been blocked by a federal judge on grounds that it would reduce industry competition by too much.
The court ruling has not held back Anthem’s stock performance. Anthem has shown steady growth across all the time horizons – ANTM’s share price is up on the 3-month, 6-month, 1-year, 3-year, and 5-year frames. The pattern is clear, even over the normal background ‘noise’ of market trading. As the old saw goes, past performance is not a guarantee of future profits, but when a stock rises steadily over an extended period it can be taken as a sign that the company is healthy.
A Solid Quarter Underpins Analyst Optimism
Turning to recent financial data, on October 30 Anthem turned in a strong Q3 report. Net income for the quarter showed a 29% increase over Q3 2017, hitting $960 million, while enrollment in medical policies totaled 39.5 million as of Sept 30. On the heels of the strong quarterly report, Anthem announced that a Q4 dividend of $0.75 per share will be paid out. Anthem paid out two dividends each in 2016 and 2017; the Q4 payout will be the second dividend of 2018.
The positive stock performance, and the solid Q3, have attracted attention from some of the top analysts. Cowen’s Charles Rhyee (Track Record & Ratings) initiated a series of ‘Buy’ ratings on ANTM two months ago with a $318 price target, citing Anthem’s large market share and high-performing Blues brand: “While others have sought merger partners, ANTM is in an enviable position to be able to move forward on its own. ANTM's unique dominant market position in most of its markets, because of the Blues brand, affords it flexibility to build out its own PBM and pursue a more partnership-based provider strategy.”
Since then, several analysts have upgraded their price targets. Two examples will show the typical comments: Stephen Halper (Track Record & Ratings) of Cantor Fitzgerald said, “We reiterate our Overweight rating on ANTM shares and increase our price target to $305 from $275. …ANTM reported solid 3Q18 results. Membership increased by 5,000.” Most encouragingly, “The company provided initial thoughts to 2019 indicating that current consensus was too low relative to their long-term growth goal.”
From SunTrust, David MacDonald (Track Record & Ratings) kept a ‘Hold’ on Anthem, but he still bumped the price target up to $315. MacDonald pointed out Anthem’s “solid core trends, improving medical costs, ongoing cost savings/efficiency initiatives, and encouraging initial 2019 commentary” as reasons for the PT increase, while also stating that he awaits further bumps in membership before upgrading to a ‘Buy.’
The analyst consensus on Anthem is currently a ‘Moderate Buy,’ with a 17% upside giving an average price target of $314. The current share price is $268; while a high entry point, the analyst consensus and upside suggest that now is the time to pick up Anthem on a discount.
The Giant in the Room
UnitedHealth Group Inc. (UNH – Research Report) is the largest health insurer in the United States, and the world generally. Based in the state of Minnesota, UNH brought in worldwide revenue of $201B in 2017 and showed net income of more than $10B.
Like Anthem, UNH showed strong results in the recent Q3 report. The company added 2.8 million customers year-over-year, and beat the earnings estimate by 28%, reporting $3.41 per share on total revenue of $56.56B.
UNH’s stock performance has reflected the company’s size and revenue. The share price – currently above $260 – has been gaining ground consistently for the last several years.
Top Analysts Agree on an Upbeat Outlook
The earnings report, released September 30, earned UNH a series of positive reviews in the first half of October. The first post-earnings review came from A. J. Rice (Track Record & Ratings), of Credit Suisse. He noted the solid quarterly results and raised the price target from $304 to $310. The EPS estimate was increased, by 25 cents to $12.80, while EPS estimates for 2019 and 2020 were raised by 30 cents each.
Meanwhile Oppenheimer’s Michael Wiederhorn (Track Record & Ratings) gave the second positive review, ramping up his price estimate to $295 and pointing out UnitedHealth’s “strong track record, elite management team and well-positioned business model” in support.
The most recent favorable rating came from David Toung (Track Record & Ratings), writing at Argus Research. Toung was impressed by the Q3 earnings beat, and cited the “strong performances from both the UnitedHealthcare global health care benefits business and the Optum health services business” when increasing the price target to $285. Along with the higher PT, he boosted his earnings-per-share outlook for 2018 and 2019, setting the current year at $12.76 and next year at $14.45. He stated that the upgraded EPS reflects “solid membership growth, a positive business mix, and margin expansion.”
Overall, the analyst consensus on UNH is a ‘Strong Buy,’ with an average price target of $302 for a 16% upside. It’s worth pointing out that even the lowest price target on this stock - $285 – is significantly higher than the current share price of $261.
Author: Michael Marcus