Strong operating performance of health insurers for the past many years continued in the first quarter of 2018. Higher medical enrollment, surging revenues, medical cost management and an increasing share of revenues from complementary services helped results. Most of the major players raised their earnings guidance for 2018, reflecting solid operating environment down the road.
Moreover, a strong U.S. economy has held the health insurance industry in good stead. A record-low unemployment rate and gradual wage increase bode well for the space. High employment and wage growth fuel demand for health insurance and various other health-related services provided by these insurers.
The overall bullishness reinforces our sentiment that the growth cadence for the sector should continue. Despite being tied by a strict regulatory regime and a fast-changing industry backdrop, insurers have time and again emerged as winners.
To put it into perspective, revenues and earnings of almost all dominant health insurers have shown a secular rise since 2010, when a sweeping and historical health care reform was put into effect by ex-president Obama.
Ever since the enactment of the healthcare reform act, numerous changes have gone into effect, which have altered the traditional operating model of the health insurers. The ensuing changes were taken sportingly by health insurers, which then adapted themselves to the changed industry dynamics.
A shift in business mix from commercial to government, the way care is delivered from fee for service to value for care, greater emphasis on medical cost management, growing consumerism and technical innovations have been the game changers.
Rapid evolution is, however, continuing in the industry. Given the need of the hour, players in the industry are taking concerted efforts to transform themselves into comprehensive health care providers from their earlier role of being traditional payers. The same is being effectuated by a cross-sector collaboration wherein health insurers are foraying into another realm of the health care sector such as pharmacy benefit management, ambulatory care and physician services.
Some of the deals that are underway in this vein are the merger of CVS Health Corp. (CVS) with Aetna Inc. (AET) and Cigna Corp. (CI) take over od Express Script Holding Co. (ESRX) as well as the UnitedHealth Group Inc. (UNH) acquisition of DaVita Inc. (DVA).
All said, the industry has remained an outperformer having generated returns higher than the S&P 500 index in each year since 2012. In the past five years, the health insurance industry has returned a whopping 257% compared with the S&P 500 index's gain of 91%.
Is Further Upside Potential Left?
While the industry has outperformed the broader market, valuations remain at the same level as that of the industry.
The Zacks HMO industry is currently trading at a forward 12-month price-to-earnings ratio of 16.95 which is near 17 for the S&P 500 index as a whole. Over the last five years, the industry has traded in a range of 10.6 to 20.1, with a median of 15.3.
We therefore go a bit further and look at the PEG ratio which bakes in the growth rate of the industry. The industry's PEG ratio is 1.3, which compares favorably with the industry's PEG ratio of 1.8. This shows that the industry is undervalued and has room for upside.
Zacks Industry Rank
Within the Zacks Industry classification, health insurers are broadly grouped in the Medical sector (one of the 16 Zacks sectors).
We rank 256 industries in the 16 Zacks sectors based on the earnings outlook and fundamental strength of the constituent companies in each industry.
We club our industries into two groups: the top half (industries with the best average Zacks Rank) and the bottom half (the industries with the worst average Zacks Rank). Over the last 10 years, using a one-week rebalance, the top half beat the bottom half by a factor of more than 2 to 1. (To learn more visit: About Zacks Industry Rank .)
Stocks Worth Adding
Though past performance does not guarantee future returns, strong industry fundamentals keep our confidence undeterred. Therefore investing in stocks from the health insurance industry is a good investment decision.
The following stocks with solid fundamental and a favorable Zacks Rank make them perfect picks.
WellCare Health Plans, Inc. (WCG): This Zacks Rank #1 (Strong Buy) stock has seen the Zacks Consensus Estimate for current-year earnings being revised 3.3% upward over the last 30 days. You can see the complete list of today's Zacks #1 Rank stocks here.
Anthem, Inc. (ANTM): This Zacks Rank #2 (Buy) stock has seen the Zacks Consensus Estimate for current-year earnings being revised 1.7% upward over the last 30 days.
Triple-S Management Corp. (GTS): This Zacks Rank #2 stock has seen the Zacks Consensus Estimate for current-year earnings being revised21.7% upward over the last 30 days.
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