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2 Health Care Stocks to Watch on GOP Congressional Takeover - Stocks in the News

Stocks historically rise after mid-term elections, and yesterday was no different. The major indices closed at record highs, and with the S&P 500 surging an average of 16% following mid-term elections since 1950, more gains could be ahead as well.

Any Changes?

The GOP will no doubt take a hard look at health care related issues now that they are the majority in both houses of Congress. Republicans have been actively opposing the implementation of cuts to medical payment insurers such as Humana ( HUM ), and lawmakers could be looking to restore some of those parts in the programs.

Medical hardware companies can see reductions in tax rates will allow them focus on growing their business such as Boston Scientific ( BSX ) and Stryker ( SYK ). Restructuring the Affordable Care Act will also be one of the leading topics on the Republicans Agenda and companies such as Johnson & Johnson ( JNJ ) could benefit in a significant way.

Let's take a closer look at some of these companies and their prospects following this electoral shift:

Humana (HUM)

Humana, Inc. is a health services company that facilitates the delivery of health care services through networks of providers to its medical members. The company's products are marketed primarily through health maintenance organizations and preferred provider organizations that encourage or require the use of contracted providers.

The company also offers various specialty products to employers, including dental, group life and workers' compensation, and administrative services to those who self-insure their employee health plans. The stock has been very volatile this week during mid-term elections and is currently trading up about .53% on Thursday at $139.92 per share.

Some analysts predict that Humana will be the highest correlate company in terms of benefiting from direct measures the GOP enacts in the near future. Humana is the second-largest insurance company that handles Medicare Advantage, right after UnitedHealth Group, and this area could be a target by the GOP.

Humana contracts with the Centers for Medicare and Medicaid Services in a program called Medicare Advantage. Often called Medicare's HMOs, Advantage is an optional program in which the federal government pays private insurance companies a set rate to treat Medicare beneficiaries. The program was conceived as a cost-containment measure on the theory that competition among private plans would drive down costs.

Some analysts will argue that the opposite has occurred, and Medicare Advantage actually costs the government more. President Barack Obama and groups like AARP have said it's time to bring the costs of Medicare Advantage in line with the cost of regular Medicare.

Earlier this year, health insurers participating in the Medicare advantage program faced a payment cut of 3.55% for next year.

Company Financials

Market Cap $21.51B Profit Margin(ttm) 2.36% Revenue(ttm) $44.44B
Enterprise $15.16B Operating Margin(ttm) 4.52% EBITDA(ttm) $2.27B
P/E(f1) 18 ROA(ttm) 5.71% Net Income(ttm) $1.05B
PEG 1.88 ROE(ttm) 10.86% Diluted EPS(ttm) 6.66

When looking at top line growth, Humana has been growing revenue in a continuous steady rate since 05' revenue at $13.104 billion and current TTM revenue at $44.440 billion. The same story goes for bottom line indicating efficient management of costs by upper management. EPS growth has also stated steady growth starting in 05' EPS of $1.72 per share and current TTM EPS of $6.66 per share.

Bottom Line

We currently rank Humana as a Zacks rank #3(hold), due to a mixed consensus on earnings estimate revisions for the coming quarters. Humana has beat earnings estimates by an average of 4.70%, and consensus estimates for fourth quarter earnings is $1.18 per share, an increase of 47.33% in YoY growth estimations. Humana will be releasing their 3Q earnings on Friday, November 7 th at 6AM ET and will be conducting an earnings conference call at 9AM ET.

Boston Scientific (BSX)

Boston Scientific Corporation is a worldwide developer, manufacturer and marketer of minimally invasive medical devices. The company's products are used in a broad range of interventional medical specialties, including cardiology, electrophysiology, gastroenterology, neuro-endovascular therapy, pulmonary medicine, radiology, urology and vascular surgery.

The stock is currently up .30% in intraday trading on Thursday and has climbed about 16% since October 17. YTD, the stock is up about 15% and was hovering around the price range $12 a share until surging in stock price at the end of October.

BSX and companies such as St. Jude Medical Inc. has a tax rate of 2.3% on their products as a part of the Affordable Care Act enacted by President Obama. Now that the Republicans are in the driver seat, this added cost might be stripped out, as it is viewed by many in the GOP as unfriendly to business. The tax rate was restricting profit margins by flowing into higher costs which would decrease their sales margin which would then decrease bottom line growth.

Obama could veto either item, as well as the repeal of the law sought by Republicans such as House Speaker John Boehner. However, the president said Wednesday he could consider further adjustments in the law.

Company Financials

Market Cap $17.74B Profit Margin(ttm) 3.93% Revenue(ttm) $7.33B
Enterprise $21.68B Operating Margin(ttm) 13.35% EBITDA(ttm) $1.70B
P/E(f1) 16.07 ROA(ttm) 3.64% Net Income(ttm) $288M
PEG 2.13 ROE(ttm) 4.34% Diluted EPS(ttm) 0.21

Historically, the stock has hit some major road bumps such as in 12' when they reported a net income of -4.068 billion while maintaining consistent revenue for the year prior of $7.249B which implies a huge influx of costs for the 12' year. The company shows resilience in that the next year in 13', reported net income was still negative, But was only -121 million showing strong growth from the year prior.

Third Quarter Highlights

  • Revenues of USD 1846 million, Net Earnings of USD 43 million and EPS of USD 0.03. Performance focus on earnings: same period year-on-year change in earnings of 960% better than change in revenues of 6.40%

  • Gross margins now 70.21% from 73.89% compared to the same period last year, EBITDA margins now 11.54% from 22.25%

  • Earnings growth due to the contribution of unusual items

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income (See complete table at the end of this report):

The company's earnings have gone up year-on-year. But this growth has not come as a result of improvement in gross margins or any cost control activities in its operations - gross and EBITDA margins are currently at 70.21% and 11.54% respectively and 73.89% and 22.25% for the same period last year. For comparison, gross margins were 72.66% and EBITDA margins 20.98% in the last quarter.

Bottom Line

We currently have BSX as a Zacks Rank #2(buy), and the medical company has beat earnings estimates by an average of 8.88% in the past year. There is mixed consensus in earnings estimate revisions, but the majority of analysts are leaning toward upgraded their earnings estimates for the current quarter up until next year.

Investors should be watching upcoming news on politics and see how the GOP try to reform laws within the medical industry that could potentially create opportunities for stocks such as HUM and BSX in the near term.

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HUMANA INC NEW (HUM): Free Stock Analysis Report

BOSTON SCIENTIF (BSX): Free Stock Analysis Report

STRYKER CORP (SYK): Free Stock Analysis Report

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


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

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