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Wall Street Journal4 HMO Stocks to Watch Despite Continued Industry Headwinds
About the Industry
The Zacks HMO industry consists of entities (either private or public) that take care of subscribers’ basic and supplemental health services. Companies in this space primarily assume risks and assign premiums to health and medical insurance policies. Industry participants also provide administrative and managed-care services for self-funded insurance. Services are generally offered by a network of approved care providers (called in-network), which include primary care physicians, clinical facilities, hospitals and specialists. However, out-of-network exceptions are made during emergencies or when it is necessary. Health insurance plans can be availed through private purchases, social insurance, or social welfare programs.
4 Key Trends Shaping the HMO Industry
High Technology Costs Incurred to Stay Abreast With a Digital Age: The HMO industry is making significant investments in developing virtual healthcare solutions, popularly known as telehealth services, to adapt to the growing digitization across all areas of healthcare. The convenience and cost-effectiveness of these services suggest that they will likely remain in high demand in the days ahead. To keep pace with the digital shift, HMO companies are being pushed to invest in technology to develop telehealth platforms that allow individuals to access healthcare from home. These platforms help attract more customers and generate a steady revenue stream for industry players. However, the technological advancements needed to support these platforms involve substantial costs, which could pressure health insurers' margins.
A Scarcity of Medical Staff: A shortage of nurses and other medical personnel remains a nationwide issue, impacting the efficient operation of hospitals as they manage increasing patient volumes. Factors contributing to the nursing shortage include a growing number of nurses nearing retirement, higher levels of burnout, and unequal workforce distribution. Health insurers partner with hospitals, physicians, and other healthcare providers to offer discounted services to their plan members. The quality of care provided is likely to remain a key factor for members in renewing health insurance plans. A shortage in the nursing workforce can hinder a hospital's ability to deliver high-quality care, which may indirectly impact the customer base of HMO companies.
Growing Premiums: Most participants in the HMO sector focus on distributing affordable health plans, upgrading them with appealing features to attract new members and retain existing ones. These enhancements not only strengthen customer satisfaction but also lead to securing federal or state contracts, which, in turn, fuel membership growth. A steady increase in membership supports ongoing premium growth, which remains the most significant revenue contributor for health insurers. With the U.S. population aging, the demand for Medicare plans, specifically designed for individuals aged 65 and above, is expected to rise consistently in the coming years. However, ongoing inflationary pressures may pose a challenge, potentially straining customers' ability to make uninterrupted healthcare premium payments.
Active M&A Moves: Apart from technology investments, an M&A strategy is often pursued by the industry players to advance their capabilities, enter new regions, delve deeper into existing ones, grow their customer base, and solidify their nationwide presence. These initiatives also aim to bring diversification benefits, which are in dire need to sustain one’s competitive edge. The Federal Reserve decided to trim interest rates by 50 basis points in its latest policy meeting. As cited by multiple sources, further rate cuts are likely to take place this year. This, in turn, may encourage more companies to pursue loans for M&A deals, allowing them to preserve cash reserves.
Zacks Industry Rank Indicates Bearish Outlook
The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all member stocks, indicates tepid near-term prospects. The Zacks Medical-HMOs industry is housed within the broader Zacks Medical sector. It currently carries a Zacks Industry Rank #231, which places it in the bottom 8% of more than 250 Zacks industries.
Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than two to one. The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of the negative earnings outlook for the constituent companies in aggregate.
Despite the dismal scenario, we will present a few stocks that one can retain, given their solid growth endeavors. But before that, it is worth looking at the industry’s recent stock-market performance and the valuation picture.
Industry Underperforms S&P 500 and Sector
The Zacks Medical-HMO industry has dipped 0.8% against the Zacks S&P 500 composite’s 34.4% growth and the Zacks Medical sector’s rally of 12.6% in the past year.
One-Year Price Performance
Image Source: Zacks Investment Research
Industry's Current Valuation
On the basis of the forward 12-month price-to-earnings (P/E) ratio, which is commonly used for valuing medical stocks, the industry trades at 15.69X compared with the S&P 500’s 22.09X and the sector’s 22.75X.
In the past five years, the industry has traded as high as 19.57X and as low as 13.07X, with the median being 16.19X, as the chart below shows.
Forward 12-Month Price/Earnings (P/E) Ratio
Image Source: Zacks Investment Research
Image Source: Zacks Investment Research
4 Stocks Worth Your Attention
We present four stocks from the space with a Zacks Rank #3 (Hold). Considering the current industry scenario, it might be prudent for investors to retain these stocks in their portfolios, as these are well-placed to generate growth in the long haul.
UnitedHealth Group: Minnesota-based UnitedHealth Group benefits from strong performance in its UnitedHealthcare and Optum divisions. UnitedHealthcare supports growth by offering affordable Medicare and Medicaid plans, while Optum thrives on acquisitions and leveraging advanced technology, market-leading health analytics, innovative care models, and data-driven population health strategies. UNH’s comprehensive telehealth services, built on substantial investments, allow for the effective delivery of virtual healthcare. Its solid financial standing supports a proactive M&A strategy.
The Zacks Consensus Estimate for UnitedHealth Group’s 2024 earnings is pegged at $27.65 per share, indicating a 10.1% rise from the 2023 reported figure. UNH’s earnings beat estimates in each of the last four quarters, the average being 2.84%.
Price & Consensus: UNH
Image Source: Zacks Investment Research
The Zacks Consensus Estimate for Cigna’s 2024 earnings is pegged at $28.48 per share, implying 13.5% growth from the 2023 reported figure. CI’s earnings outpaced estimates in each of the last four quarters, the average being 3.83%.
Price & Consensus: CI
Image Source: Zacks Investment Research
Humana: Headquartered in Kentucky, Humana continues to experience growth fueled by higher premiums and an expanding customer base. The robust performance of these plans has led to numerous contract wins and renewed agreements with both federal and state authorities. Humana actively addresses the healthcare needs of the nation's elderly population through its CenterWell brand, launched in 2022. Over the years, Humana has made a series of acquisitions, including Family Physicians Group, iCare, and Inclusa.
The Zacks Consensus Estimate for Humana’s 2024 earnings is pegged at $16.12 per share. HUM’s earnings surpassed estimates in three of the last four quarters and missed the mark once.
Price & Consensus: HUM
Image Source: Zacks Investment Research
Molina Healthcare: This California-based health insurer develops affordable Medicare and Medicaid plans, enriched with extensive benefits, which have consistently led to contract wins. These contracts have contributed to a steadily growing customer base for MOH. Management remains optimistic about achieving long-term premium revenue growth in the range of 13-15%. Over the years, a series of strategic acquisitions have expanded its business portfolio. This July, Molina Healthcare inked a definitive agreement to purchase ConnectiCare, which is expected to bolster the health insurer’s presence in Connecticut.
The Zacks Consensus Estimate for Molina Healthcare’s 2024 earnings is pegged at $23.50 per share, indicating a 12.6% rise from the year-ago reported figure. MOH’s earnings beat estimates in each of the last four quarters, the average being 3.14%.
Price & Consensus: MOH
Image Source: Zacks Investment Research
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UnitedHealth Group Incorporated (UNH): Free Stock Analysis Report
Humana Inc. (HUM): Free Stock Analysis Report
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Cigna Group (CI): Free Stock Analysis Report