Obamacare Is Coming, Ready Or Not

By Jonathan Berr | October 09, 2013 AAA

President Obama’s signature legislative achievement will go live starting October 1 when the government-backed health care exchanges are set to be rolled out unless by some miracle the U.S. Congress is able to stop it.

Whether Obamacare will do much to reduce health care costs is tough to say. Recent data released by the Center for Medicare Services' Office of the Actuary paints a depressing picture. Spending is expected to increase 6.1% in 2014 thanks to coverage expansions in the law, known as the Affordable Care Act. Growth is expected to rise to 6.2% per year thereafter. Health spending financed by local, state and federal governments is expected to total $2.4 trillion, about 49% of national health spending.

Both traditional insurers and those specializing in providing services to Medicare and Medicaid have posted impressive gains ahead of the start of Obamacare. Though the good news appears to have been factored into many of these stocks, there are a few standouts that investors might consider.

Aetna ​(NYSE:AET) and Cigna ​(NYSE:CI) both look like good buys. Thanks to its $5.7 billion acquisition last year of Coventry Health, Aetna solidified its foothold in the Medicare and Medicaid programs. Cigna is in good shape as well. As J.P. Morgan noted in a recent report, Cigna has a below-average exposure to the uncertainties in Obamacare and has a strong Medicare Advantage and international segment. With a price-to-earnings multiple of 12.82, Aetna is cheaper than Cigna, whose P/E is 15.59.

One of the few things experts agree about Obamacare – and they don’t agree on much – is that more customers are coming to health insurers. As Barron’s noted recently, a whopping 55 million Americans lack health insurance. Next year, some 11 million uninsured Americans will get some sort of coverage. By 2017, the number of people without coverage is expected to fall to 30 million. The road ahead for these companies is not going to be easy.

“Concerns have mounted in recent months as healthcare exchanges have endured glitches and some states have attempted to obstruct their rollout,” the publication says. “As a result, big insurers have eschewed the exchanges, worried that too few young and healthy Americans will enroll and offset the cost of insuring more people with chronic or expensive to treat medical problems.”

Another way to play Obamacare is with the insurers that exclusively focus on government-sponsored health plans such as Molina Health Care (NYSE:MOH) Centene ​(NYSE:CNC) and WellCare Health Plans (NYSE:WCG). As Barron’s noted, these companies would be sitting pretty even if there was no Obamacare since a growing number of states have been turning to private insurers to manage benefits for Medicaid recipients to save money. Molina seems to be the best deal here.

Earnings at the Long Beach, Calif., company have rebounded this year as its operations in Texas, the company’s largest market, improved from an earlier loss. The company’s costs fell in the Lone Star state while its rates rose. As for Centene and WellCare, whose earnings also have improved, the good news seems to have been factored into their stock prices.

During the most recent quarter, enrollment at Centene surged more than 12% as it expanded its foothold in Mississippi and Texas and won business in Washington, Kansas and Missouri. WellCare recently hiked its guidance for the year to between $4.70 and $4.90 per share, up from $4.60-$4.90. Premium revenue is expected to be $9.15 billion to $9.25 billion, versus earlier expectations of $8.9 billion to $9 billion.

Centene trades at a frothy P/E of 47.4 and is trading ahead of its 52-week target. On the other hand, WellCare offers more value with a multiple nearing 20 and a 6.54% upside surprise. All three companies are acquisition targets in the wake of Wellpoint’s $4.9 billion acquisition of Amerigroup, which created the largest private provider of Medicaid.

“You have more and more people entering Medicaid,” Frank Ingara of NorthCoast Asset Management LLC, told Bloomberg. “That’s creating an opportunity for them to get more dollars.”

The Bottom Line

There’s going to be plenty of money to be made in Obamacare, but stock investors need to be selective to find the best value.

Follow Jonathan Berr on Twitter@jdberr and at Berr’s World.

Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.

comments powered by Disqus
Related Analysis
  1. Bull of the Day: Gilead Sciences (GILD) - Bull of the Day
    Stock Analysis

    Bull of the Day: Gilead Sciences (GILD) - Bull of the Day

  2. Bear of the Day: Loews Corp (L) - Bear of the Day
    Stock Analysis

    Bear of the Day: Loews Corp (L) - Bear of the Day

  3. Q3 Estimates Beginning to Slip - Ahead of Wall Street
    Stock Analysis

    Q3 Estimates Beginning to Slip - Ahead of Wall Street

  4. Health Insurance: Reinvention Through Obamacare - Industry Outlook
    Stock Analysis

    Health Insurance: Reinvention Through Obamacare - Industry Outlook

  5. Bull of the Day: Gilead Sciences (GILD) - Bull of the Day
    Stock Analysis

    Bull of the Day: Gilead Sciences (GILD) - Bull of the Day

Trading Center