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7 Health-Care Stocks to Weather Court Challenges

Cost of healthcare
Lilli Day | Photodisc | Getty Images
Cost of healthcare

The Supreme Court hearings this week on reforming the two-year-old health-care laws is stirring investor concerns.

The court has until June to hand down a decision on possible reforms to the Affordable Care Act (ACA), but participants at the hearings may tip their hand and give investors some direction on what, if any, industry players will be affected.

Health-care stocks have underperformed the broader market this year amid the uncertainty over the review. The sector, as tracked by Standard & Poor’s, is up 6.4 percent this year, versus the S&P 500 index’s 11.6 percent gain.

The consensus now is that there won’t be significant changes to the ACA, and that is seen as a mild positive for most in the industry, particularly the big managed-care companies.

Goldman Sachs said in a research note this week that in its poll of over 200 institutional investors, 70 percent said they expect the ACA to be upheld by the court.

A key and polarizing issue is whether Congress holds the constitutional power to require Americans to carry health insurance or pay a penalty.

“Hospital stocks would see the most upside on a ruling to uphold the individual mandate (which requires that individuals buy insurance), and we expect the most downside in a decision other than to uphold the law," Goldman analysts said.

But Citigroup analyst Carl McDonald said in a research note Monday that he doesn’t think managed-care companies will have much negative or positive out of this week’s events.

But stocks are likely to move on the court decision, McDonald writes: “The good news for us is that under every scenario but one, we believe the managed-care stocks are going higher, in some cases meaningfully higher. In the event of the one scenario perceived negative by the market, which is where the Supreme Court strikes the individual mandate, but upholds the rest of the legislation, (it) really isn't all that bad fundamentally” for big managed-care players.

S&P Capital IQ has a similar take, as it says, “managed-care companies could benefit regardless” of whether or not the health-care-reform law is scrapped, an event it said is “unlikely.”

That’s because the current ACA law is expected to increase the number of insured patients seeking medical help and push them into getting coverage.

On the down side for for-profit hospitals, “it will also phase in Medicare payment cuts to hospitals and will make it harder to negotiate reimbursement rates,” which will cut into profits, S&P said.

“Whether the insurance-buying mandate is upheld, and whether the court rules the rest of the law can stand without it, will be key for big managed-care firms,” S&P said, including WellPoint, UnitedHealth Group, and Aetna.

S&P is bullish on managed-care companies, with “buy” ratings on the five biggest.

Here are seven health-care providers that could be impacted by the Supreme Court’s decision on health-care reform and their prospects:

7. WellPoint

Company profile: WellPoint , with a market value of $23 billion, is one of the largest U.S. health insurers by medical membership, serving 34 million people. It holds the exclusive license to the Blue Cross and/or Blue Shield names in 14 states.

Investor takeaway: Its shares are up 1 percent this year and have a three-year, average annual return of 24 percent. Analysts give its shares nine “buy” ratings, six “buy/holds,” and seven “holds,” according to a survey of analysts by S&P. S&P has a “buy” rating and a $78 price target, which is a 17 percent premium to the current price. S&P says the company “has been executing well in a soft economy, and we believe it has the scale, well diversified membership and strong cash flow to manage better than most insurers amid health-care reform.”

6. Humana

Company profile: Humana, with a market value of $14 billion, provides health insurance and related services to employers, individuals, and beneficiaries of government programs. More than 70 percent of its 11.1 million members are in government programs.

Investor takeaway: Its shares are down 2 percent this year, but have a three-year, average annual return of 50 percent. Analysts give its shares nine “buy” ratings, five “buy/holds,” and seven “holds,” according to a survey of analysts by S&P. S&P has its shares rated “buy,” with a $104 price target, which is a 19 percent premium to its current price. S&P, which has Humana shares rated “strong buy,” says “we think (it) has the scale, diversity and flexibility to adjust to the health-care reform law.” S&P has a $104 price target, which is a 21 percent premium to the current price.

5. UnitedHealth Group

Company profile: UnitedHealth , with a market value of $57 billion, is a health-care-services provider to more than 78 million people. Its products include risk-based health insurance, and non-risk-based plan management for self-insured employers.

Investor takeaway: Its shares are up 6.2 percent this year and have a three-year, average annual return of 36 percent. Analysts give its shares 11 “buy” ratings, six “buy/holds,” and five “holds,” according to a survey of analysts by S&P. S&P, which has the shares rated “buy,” with a $62 price target, a 15 percent premium to the current price, says “we see continued membership gains, assuming attractive commercial products, a rising Medicare population, and the increasing transition of Medicaid beneficiaries into managed care.” It’s expected to earn $4.83 per share this year.

4. Aetna

Company profile: Aetna , the nation’s third-largest managed-care organization with a market value of $16 billion, provides risk-based health insurance and non-risk-based benefits plan management services.

Investor takeaway: Its shares are up 8.5 percent this year and have a three-year, average annual return of 24 percent. Its shares carry a 1.54 percent dividend yield. Analysts give its shares nine “buy” ratings, four “buy/holds,” and seven “holds,” according to a survey of analysts by S&P. S&P has its shares rated “buy” with a $54 price target, which is an 18 percent premium to the current price. S&P says, “We think Aetna has the scale, diversity, innovative health information technology and healthy cash flow to perform better than most insurers amid health-care reform.”

3. Cigna

Company profile: Cigna, with a market value of $13 billion, is a diversified insurance company with a focus on fee-based health-insurance administrative services. The company is one of the nation’s largest managed-care organizations, with more than 11 million medical members.

Investor takeaway: Its shares are up 9.2 percent this year and have a three-year, average annual return of 35 percent. Analysts give its shares eight “buy” ratings, three “buy/holds,” and nine “holds,” according to a survey of analysts by S&P. S&P has it rated “buy,” with a $54 price target, which is an 18 percent premium to the current price. It says: “We view its growing diversity and long-term (earnings per share) growth prospects as promising.” It’s expected to earn $5.43 per share this year and that that will grow by 11 percent next year.

2. HCA Holdings

Company profile: HCA Holdings, with a market value of $11 billion, is the largest private hospital owner and operator in the U.S., with 163 hospitals and 108 outpatient centers.

Investor takeaway: Its shares are up 23 percent this year. Its IPO was about a year ago. Analysts give its shares 12 “buy” ratings, six “buy/holds,” and seven “holds,” according to a survey of analysts by S&P. Morningstar says that its large number of operations in the Sun Belt give it access to fast-growing urban markets, including lots of baby boomers, in “states that typically have less stringent oversight of insurance premium hikes,” but “unemployment will continue to hinder hospital profitability.” Analysts also warn about the company’s very high debt load potentially becoming a problem if there are Medicaid budget cuts.

1. Tenet Healthcare

Company profile: Tenet Healthcare, with a market value of $2.2 billion, is one of the nation’s largest acute-care companies. It operates 49 acute-care hospitals, as well as 21 ambulatory surgery centers, and 50 diagnostic imaging centers.

Investor takeaway: Its shares are up 2.3 percent this year and have a three-year, average annual return of 66 percent. Analysts give its shares three “buy” ratings, three “buy,” 13 “buy/holds,” and one “holds,” according to a survey of analysts by S&P. S&P, which has it rated “holds,” says the rating reflects “what we view as long-term uncertainty over Medicare reimbursement rates and weak patient acuity trends” as well as its patient mix “which has trended toward less profitable Medicare and Medicaid during an uneven economic recovery.”

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