2 Health Insurers Promising Earnings Beat in Q2

The second quarter of 2015 saw frenzied mergers in the health insurance industry with players snapping up rivals to grow and remain competitive in a fast changing landscape.  

In fact, the growth outlook for the industry is being dictated by inorganic growth as players seek to enhance market share through mergers and acquisitions. Earlier this month, Aetna Inc. AET announced that it will acquire Humana Inc. HUM for $37 billion and Centene Corporation CNC signed a deal to buy Health Net, Inc. HNT. Also, an Anthem Inc. ANTM and Cigna Corp. CI merger is in the cards with the former aggressively bidding to add the latter to its portfolio.

The second quarter also heard positive ruling from the Supreme Court on the SCOTUS case, which upheld subsides given to the enrollees who bought insurance cover from the federal exchange.  The decision is a net positive for the health insurers who would have faced an out flow of members if the subsidies were to be scrapped.

The removal of the subsidies would have caused a "death spiral" as healthier people would then have less incentive to participate in the market. Keeping the subsidies intact has made insurance more affordable for anybody – either healthy or sick. This combination of customers will improve the customer profile of health insurers, enabling them to spread the risk to a larger pool of members thus reducing their claims cost.

The year 2015 thus far has been strong for health insurers who continue to benefit from growth led by the Affordable Care Act (ACA)-driven Medicaid expansion as well as public exchanges, a benign flu season and a lower-than-expected medical utilization rate.  

The health sector has reverted to the historical patterns of bouncing back as the nation is showing recovery from economic doldrums. Either by spending more confidently thanks to an improved economy or by shopping with ACA-covered insurance, consumers have primarily set the growth engine for the sector rolling.

Insurers have witnessed an overall rise in enrollment largely made possible by the influx of millions of uninsured patients, courtesy of the health care reform.  The expansion of Medicaid also turned out to be a boon for the health insurance industry. The exchanges, established in Oct 2013, have brought a big business for insurers like Aetna and Anthem, which enrolled customers in flocks in 2014. The trend continues this year too.

Healthy top-line growth is also expected in segments such as Medicare Advantage and Medicaid. In Medicare Advantage, baby boomers reaching 65 should offer a secular growth tailwind, while seniors continue to prefer the private Medicare Advantage product over the government-run Fee-for-Service offering.

The health insurance industry business model is driven by medical utilization (demand for health care services in the U.S. It was feared that an improving economy would prompt millions of insured Americans to access medical care to a higher extent, causing a sharp spike in medical utilization ratio and consequently leading to higher claims payment which goes on to erode the bottom line. However, the utilization rate to date for 2015 turned out lower than expected, thereby shielding the margin of the health insurers.

Insurers' earnings are also expected to see accretion from their international operations. Some players – Aetna, Cigna and UnitedHealth Group – have extended their business beyond the national boundaries in the wake of stringent regulations in the home turf. However, a strong U.S. dollar will be a drag on the earnings of the players.

Moreover, strong balance sheets with low leverage and attractive organic cash flow generation, along with excess capital in the form of statutory reserves and parent cash continue to make this an attractive sector.

Overall, the health insurance scenario looks favorable for its players. Thus, it may be a good idea to look at some companies in the health insurance sector that have the potential to beat earnings in their upcoming releases. These stocks are well positioned in the present market, and could see considerable upside riding on the aforementioned trends. An earnings beat should help these stocks gain investor confidence and show a favorable price movement.

How to Pick?

Given a large number of industry participants, pinpointing stocks that have the potential to beat estimates could appear to be a daunting task. But our proprietary methodology makes it fairly simple.

One way to narrow down the list of choices this earnings season is by looking at stocks that have the combination of a favorable Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) – and a positive Earnings ESP. Notably, Earnings ESP is our proprietary methodology for identifying stocks that have high chances of surprising in their next earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate.

Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.

Below are three health insurance stocks that we believe are best positioned to stand out this earnings season.

Anthem Inc. has a Zacks Rank #1 and an Earnings ESP of +0.74%. The Zacks Consensus Estimate for the second quarter stands at $2.71 per share. Humana will announce second-quarter results before the opening bell on Jul 29.

Centene Corp. has a Zacks Rank #1 and an Earnings ESP of +1.45%. The Zacks Consensus Estimate for the second quarter stands at $0.69 per share. Centene will announce second-quarter results on Jul 28.

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AETNA INC-NEW AET: Free Stock Analysis Report
 
HUMANA INC NEW HUM: Free Stock Analysis Report
 
CIGNA CORP CI: Free Stock Analysis Report
 
HEALTH NET INC HNT: Free Stock Analysis Report
 
CENTENE CORP CNC: Free Stock Analysis Report
 
ANTHEM INC (ANTM): Free Stock Analysis Report
 
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