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6 Stocks Poised to Double

The mundane business of managing health-care benefits and services may be a bore for those working in the industry, but shares in that sector have been a boon for investors.

American healthcare reform
Tom Grill | Photographer's Choice RF | Getty Images
American healthcare reform

Humana, WellPoint, UnitedHealth and Aetna are on pace to more than double this year after rising 40 percent so far in 2011, rivaling many technology companies including Apple , Nvidia — even Netflix .

The managed health-care industry, under pressure last year from so-called ObamaCare, Republicans' cynical term for the president's attempt to provide millions of Americans with health-care coverage, have said they can profitably manage changes under the new rules.

Many companies posted earnings growth of 30 percent last year, followed by more gains in the first quarter.

The S&P Managed Health Care Index jumped 39 percent this year through May 13 versus the benchmark S&P 500 Index' 6.4 percent return. Last year, the health-care index rose 9.5 percent, trailing the S&P 500's 12.8 increase.

Other positive factors are that the fragmented industry is seen as ripe for consolidation, which means investors can get a hefty premium on buyouts, and an overarching trend: The industry will benefit from the aging population's increasing health-care needs, especially now that the first of the Baby Boomer are retiring.

Managed-care companies are essentially administrators of health-care coverage benefits for people enrolled in employer-sponsored plans as well as managers of prescription plans and government health-care programs such as Medicare and Medicaid.

Jeffrey Loo, a health-care industry analyst for S&P, said most of the major managed health-care firms "blew their earnings numbers out of the water" in the first quarter, referring to companies that reported results that were much better than analysts' estimates.

For example, UnitedHealth beat estimates by 35 cents per share, reporting $1.22 per share, while WellPoint came in at $2.35 per share versus analysts' estimates of $1.87.

Loo told TheStreet that another factor contributing to the unexpectedly strong first-quarter results is the weak economy. People are putting off going to the doctor or refilling prescriptions on schedule so there is lower-than-expected utilization of health-care services.

And, historically, the first quarter typically sees a slower demand for health care because people face new deductibles at the start of the year and so postpone appointments, he said.

Here are six managed-care companies that have seen significant share-price gains this year:

- UnitedHealth Group provides health-care products and services to over 32 million enrollees nationwide. The Minnesota-based company's programs are primarily for businesses' employees and individuals. Those programs include health maintenance organizations (HMOs), point of service plans, preferred provider organizations (PPOs), and managed fee-for-service programs.

Standard & Poor's has a "buy" rating on its shares and a $55 price target, which is an 8.5% premium to its current price. "Our risk assessment reflects UnitedHealth's leadership in the highly fragmented managed-care market, its wide geographic market and its product diversity, which we believe permits stable operational performance even during periods of economic downturn," said the firm's research report.

Analysts' rankings reviewed by S&P resulted in seven "buy" ratings, 12 "buy/holds" and eight "holds."

For fiscal 2011, analysts estimate UnitedHealth will earn $4.20 per share and that will grow by 9% to $4.58 per share in 2012.

UnitedHealth's shares are up 41% this year and 69% over the past 12 months, giving it a market value of $55 billion.

- Humana is one of the nation's biggest providers of privately run Medicare Advantage health plans. In particular, it provides health insurance and related services to employers, individuals and beneficiaries of government programs. Of its 10.9 million members, more than 70% are in government programs, including Medicare Advantage (the private managed-care alternative to original Medicare), Medicare prescription drug plans and Medicaid for low-income families.

"We believe Humana has a good opportunity to gain (Medicare Advantage) members, assuming a health-insurance industry shakeout occurs amid health-care reform," S&P analysts said in a recent research note.

Humana is expected to earn $7.02 per share for fiscal 2011 and that will grow by 2% to $7.19 per share in 2012, according to analysts' estimates.

S&P has an $85 price target on its shares, which is a 7% premium to its current price.

Its shares are up 46% this year and 73% over the past 12 months.

- WellPoint is the largest U.S. health insurer by medical membership, with 34 million people covered. It holds the exclusive license to the Blue Cross/Blue Shield name in 14 states, including California, Georgia, New York and Ohio. WellPoint's business mix is weighted toward the commercial market, with a particular focus on small-group coverage.

S&P analysts estimate that WellPoint will post $7 per share operating earnings for 2011, helped in part by share buybacks, and that earnings will rise to $7.50 per share in 2012.

Its shares are up 44% this year and 5$% over the past 12 months, recently trading at $81.74, giving the company a market value of $30 billion.

- Cigna is a diversified insurance company but primarily a provider of fee-based health-insurance administrative services. Its medical managed-care organizations have more than 11 million members.

S&P analysts report that they "view Cigna's target of 10% to 13% three- to five-year earnings per share growth as achievable" because the company is seeing healthy membership gains. They have a 12-month target price of $54 on its shares based on a 10.5 times multiple to their 2011 earnings estimate, a ratio that "is a bit below peers but above its historical average."

Its shares are trading at $49.53, giving the company a market value of $13 billion. The stock is up 36% this year and 47% over the past 12 months.

- Aetna is a provider of risk-based health insurance and non-risk-based benefits plan management services. It has about 18 million enrollees. It is also a provider of pharmacy-benefits management, dental coverage, and group life and disability insurance.

S&P analysts have a "buy" rating on its shares and give the company a four-star ranking out of a possible five. "We think Aetna has the scale, diversity and financial flexibility to manage better than most insurers amid health-care reform."

They give it a 12-month price target of $48, a 5% premium to its current price.

For fiscal 2011, analysts' consensus estimate is that Aetna will earn $4.32 per share, and that will grow by 5% to $4.53 per share in 2012.

Aetna's shares are up 49% this year to $45.83 and 53% over the past 12 months, giving it a $17 billion market value.

- Healthspring, the smallest player in this group with a market value of $2.9 billion, is a Medicare Advantage provider for 305,000 members at year end 2010. It also manages Medicare prescription drug plans offered through health maintenance organizations in five states. In November 2010, the company acquired Bravo Health, which added about 105,000 Medicare Advantage and 301,000 Medicare prescription drug program members.

For fiscal 2011, analysts estimate it will earn $3.69 per share and that will grow by 8% to $4 per share, according to S&P.

In the past week, its shares received two price upgrades. Citigroup raised it to "buy" from "hold" on May 13, and lifted its price target to $52 from $46. Jefferies gave it a "buy" rating May 18, with a $48 price target. Its shares are currently trading at $44.30.

According to Bloomberg, analysts have six "buy" ratings and eight "holds" on Healthspring's stock.

It has seen the most share-price appreciation of any managed-care company, gaining 67% this year and 153% over the past 12 months.

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TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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