With healthcare costs outpacing inflation, the medical industry is well-positioned for growth due to the necessity of health insurance to mitigate financial risks, a growing elderly population, and the rising incidence of chronic diseases.
Amid this backdrop, it could be wise to add fundamentally strong medical stocks: Humana Inc. (HUM), Molina Healthcare, Inc. (MOH), and Centene Corporation (CNC).
Before diving deeper into the fundamentals of these stocks, let’s discuss why the health insurance industry is well-positioned for growth.
The medical industry faces rising costs driven by drug prices and chronic diseases. Despite these challenges, the industry is thriving with increasing demand and technological advancements, reflected in substantial returns, demonstrating resilience and expansion.
Medical supply needs are anticipated to rise due to technological advancements, telemedicine, and evolving healthcare demands. The global medical supplies market is projected to reach $163.50 billion by 2027, growing at a CAGR of 3.4%.
Despite market fluctuations and high inflation, total health expenditure is expected to rise. The Centers for Medicare and Medicaid Services predict that between 2022 and 2031, health spending is projected to outgrow GDP, increasing the health spending share of GDP from 18.3% in 2021 to 19.6% in 2031.
Moreover, as the population grows and ages, the demand for medical services and health insurance rises. Health expenditures are a priority regardless of economic cycles, allowing health insurance companies to boost their profit margins.
The global health insurance market is projected to grow at a CAGR of 9.4% to reach $4.66 trillion by 2032.
Considering these conducive trends, let’s analyze the fundamental aspects of the three Medical - Health Insurance industry picks, beginning with the third choice.
Stock #3: Humana Inc. (HUM)
HUM and its subsidiaries operate as a health and well-being company in the United States. It operates through two segments, Insurance and CenterWell. The company offers medical and supplemental benefit plans to individuals.
In terms of the trailing-12-month levered FCF margin, HUM’s 12.35% is significantly higher than the 0.55% industry average. Its 1.91x trailing-12-month asset turnover ratio is 399.6% higher than the 0.38x industry average. Its 4.87% trailing-12-month EBIT margin is significantly higher than the 0.42% industry average.
HUM’s adjusted revenues for the second quarter ended June 30, 2023, increased 14.2% year-over-year to $25.73 billion. Its adjusted income from operations of the Insurance segment increased 4% from the prior-year period to $1.17 billion.
The company’s adjusted pretax results rose 1.5% from the year-ago value to $1.47 billion. Also, its adjusted EPS came in at $8.94, representing an increase of 2.1% year-over-year.
Street expects HUM’s EPS and revenue for the quarter ended September 30, 2023, to increase 4.1% and 12.2% year-over-year to $7.17 and $25.58 billion, respectively. It surpassed Street EPS estimates in each of the trailing four quarters. Over the past three months, the stock has gained 18.4% to close the last trading session at $521.69.
HUM’s POWR Ratings reflect strong prospects. It has an overall rating of A, which translates to a Strong Buy in our proprietary system. The POWR ratings assess stocks by 118 different factors, each with its own weighting.
It is ranked #4 out of 11 stocks in the A-rated Medical - Health Insurance industry. It has an A grade for Quality and a B for Value. Click here to see HUM’s ratings for Growth, Momentum, Stability, and Sentiment.
Stock #2: Molina Healthcare, Inc. (MOH)
MOH provides managed healthcare services to low-income families and individuals under the Medicaid and Medicare programs and through the state insurance marketplaces. It operates in four segments, Medicaid; Medicare; Marketplace; and Other.
On September 5, 2023, MOH announced the completion of its acquisition of My Choice Wisconsin (MCW) on September 1, 2023. As of June 30, 2023, MCW served over 44,000 members.
On June 30, 2023, MOH announced a definitive agreement to acquire Brand New Day and Central Health Plan of California, Bright Health Company of California, Inc. (BHCA) subsidiaries. This acquisition supports MOH’s 2024 Medi-Cal contract, D-SNP growth initiatives, and the Los Angeles County 2024 D-SNP option, expected to add $1 per share to new store-embedded earnings, totaling $5.50 per share.
MOH’s President and CEO Joe Zubretsky said, “These additions fit perfectly with our strategy of serving high-acuity, low-income members and represent a textbook execution of our growth playbook. We acquire viable assets at attractive valuations, then deploy our proven team of operators to deliver improved financial results.”
In terms of the trailing-12-month EBITDA margin, MOH’s 5.26% is 5.2% higher than the 0.70% industry average. Likewise, its 2.43x trailing-12-month asset turnover ratio is 534.3% higher than the 0.38x industry average. Additionally, the stock’s 2.76% trailing-12-month levered FCF margin is 403.2% higher than the 0.55% industry average.
For the fiscal second quarter ended June 30, 2023, MOH’s total revenue increased 3.4% year-over-year to $8.33 billion. Its adjusted net income increased 22.9% over the same period last year to $327 million.
Its operating income for the period increased 22.7% from the prior-year period to $443 million. In addition, its adjusted EPS came in at $5.65, representing an increase of 24.2% year-over-year.
For the quarter ended September 30, 2023, MOH’s EPS and revenue are expected to increase 11.7% and 3.7% year-over-year to $4.87 and $8.22 billion, respectively. It surpassed Street EPS estimates in each of the trailing four quarters. Over the past six months, the stock has gained 23.9% to close the last trading session at $360.12.
MOH’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.
It has a B grade for Value and Quality. Within the same industry, it is ranked #3. Click here to see MOH’s Growth, Momentum, Stability, and Sentiment ratings.
Stock #1: Centene Corporation (CNC)
CNC operates as a healthcare enterprise that provides programs and services to underinsured and uninsured families, commercial organizations, and military families in the US. It operates in two segments: Managed Care and Specialty Services.
On August 28, 2023, CNC announced the sale of Circle Health Group to PureHealth for approximately $1.2 billion as part of its strategic portfolio refocus on core business lines. The transaction is subject to regulatory approvals and is expected to close in Q1 2024.
CNC’s Chief Executive Officer, Sarah London, said, “We are confident that this business will continue to thrive – providing access to high-quality care and delivering improved clinical outcomes under the ownership of Pure Health. This transaction marks another milestone in our portfolio review and showcases continued momentum against our value creation plan."
On June 13, 2023, CNC announced the completion of the divestiture of Apixio, a leading AI platform for value-based care, to New Mountain Capital. This acquisition is expected to enhance the company’s operative capability.
In terms of the trailing-12-month EBIT margin, CNC’s 3.49% is 733.9% higher than the 0.42% industry average. Likewise, its 1.69x asset turnover ratio is 340.9% higher than the 0.38x industry average. Additionally, the stock’s 5.12% trailing-12-month levered FCF margin is 834.9% higher than the 0.55% industry average.
For the fiscal second quarter that ended on June 30, 2023, CNC’s total revenues increased 4.6% year-over-year to $37.61 billion. Its adjusted net earnings rose 10.8% over the prior-year quarter to $1.16 billion. Likewise, its adjusted EPS came in at $2.10, representing an increase of 18.6% year-over-year.
Analysts expect CNC’s EPS and revenue for the quarter ended September 30, 2023, to increase 18.3% and 0.7% year-over-year to $1.54 and $36.13 billion, respectively. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past three months, the stock has gained 10% to close the last trading session at $72.98.
It’s no surprise that CNC has an overall rating of A, which translates to a Strong Buy in our proprietary POWR Ratings system.
It has an A grade for Value and a B for Growth and Quality. Within the Medical - Health Insurance industry, it is ranked #2. To see CNC’s ratings for Momentum, Stability, and Sentiment, click here.
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HUM shares were trading at $522.63 per share on Thursday afternoon, up $0.94 (+0.18%). Year-to-date, HUM has gained 2.61%, versus a 13.49% rise in the benchmark S&P 500 index during the same period.
About the Author: Abhishek Bhuyan
Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments.
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