Bank Of America Raises Price Targets On Managed Care Companies

Bank of America on Tuesday raised price targets for several managed care companies.

Analyst Kevin Fischbeck noted the firm’s monthly Trend Tracker with a “Q4 trend of 3.7 percent vs 3.8 percent in Q3” and the “PMPM trend controlled.”

The “Trend Tracker report focuses on tracking utilization through an index based on proprietary hospital volume surveys and industry data...we believe that core PMPM utilization trend remains controlled given that our index includes the impact of population growth and Reform. We are increasing POs for our MCO coverage.”

Below are analyst comments on each of the companies covered:

Aetna Inc AET

Our Price Objective of $92 is based on 13x our 2015 EPS estimate, modestly above its historical average, given what we see as an improving regulatory backdrop for managed care as we progress through HC Reform. Risks to the upside are better-than-expected membership growth and another large acquisition. Risks to the downside are worse-than-expected membership growth, rising cost trend, and greater than expected HC Reform disruption.

Centene Corp CNC

Our $114 price objective represents a 21.9x P/E on our 2015E EPS. This valuation is consistent with precedent during periods of accelerating revenue growth like 2005-2006 and early 2012. Upside risks to our price objective are higher-than-expected volume growth from expansion and exchanges, strong performance regarding RFPs and favorable reversion of margins to the mean. Downside risks to our PO are unfavorable positioning for Medicaid expansion, concerns around the industry tax, lack of HCV reimbursement, or a higher-than-expected cost trend on new or existing members.

CIGNA Corporation CI

Our price objective of $120 represents 14.4x our 2015 EPS estimate, a premium to CI's five-year average valuation, but, in our view, justified given its above average growth profile expected over the next few years. Risks to the downside are that the CTRX partial outsourcing does not deliver expected accretion and that the impact of Health Care Reform will be worse than expected.

Health Net, Inc. HNT

Our $61 PO represents 14x our 2016 "base case" estimate (includes a modest contribution from the outsourcing), representing a premium to the historical average (11.4x). The premium is justified by HNT's rapid revenue growth, which we expect to grow a 19% CAGR, and is a 3x discount to Medicaid MCOs with similar growth profiles, in line with HNT's historical discount to that group. Upside risks to the PO are sustaining Q1 Medicaid results, modest improvement in large/small group commercial profitability, better than expected Medicare Advantage profitability, and better than expected fixed cost leverage. Downside risks to the PO are higher than expected new business MLRs, continued pressure on large/small group commercial results, and lower than anticipated upside from a significant G&A outsourcing initiative.

Humana Inc HUM

Our $146 PO represents 16.2x our 2015 EPS estimate, a premium to its historical average justified by the strong outlook for Medicare Advantage sales growth. We believe the rate environment in 2014 and 2015 may be more manageable than initially feared, but believe the pressure on Medicare Advantage rates could extend into 2016 and potentially beyond. Downside risks to our PO are rapid membership growth leading to higher than anticipated costs, incremental reimbursement rate pressure in 2016 and beyond, exchange pricing, doc ownership. Shares could outperform on better than expected execution to offset rate cuts or accretive capital deployment.

Molina Healthcare, Inc. MOH

Our $57 PO is based on a 24.8x forward P/E, at the upper end of its historical range, albeit on low margins that we believe will trend higher over time. Upside risks to our price objective are faster than expected profit margin expansion on either rate increases or lower cost trends, better than expected results regarding dual eligible pilots, and a takeout that comes at a substantial premium. Downside risks are continued negative guidance revisions, dual eligible implementation delays, lack of HCV reimbursement, rate cuts and higher than expected utilization.

UnitedHealth Group Inc. UNH

Our $112 price objective represents 18.5x our 2015 EPS estimate, a premium to its historical average justified by relative valuation to the S&P 500. A downside risk to our PO is that the enrollment benefits of Health Care Reform would be more than offset by costs to the industry.

Universal American Corporation UAM

Our $7.50 price objective is 1x tangible book value, generally in line with recent trading, and implies a P/E of 50x our 2016 EPS estimate. This valuation is based on our low EPS estimate reflecting reimbursement headwinds, but acknowledges the potential for upside from deploying the substantial excess regulatory capital at its subsidiaries. Downside risks to our price objective are reimbursement rate cut headwinds and unfavorable ACO experience. Upside risks to our price objective are are meaningful ACO savings and SG&A savings opportunities.

WellCare Health Plans, Inc. WCG

Our $82 PO represents 21.8x our 2015 EPS estimate, a premium to its historical average, on trough earnings due to FL MMA costs, MA costs, and PDP costs that we expect will be addressed over the next 12-18 months. Upside risks to our price objective are lower-than-expected cost trend on new or existing members, strong performance regarding RFPs and favorable reversion of margins to the mean. Downside risks to our PO are unfavorable positioning for RFPs, concerns around the industry tax reimbursement, lack of HCV reimbursement, or a higher than-expected cost trend on new or existing members.

WellPoint Inc WLP

Our $148 PO represents 15.7x our 2015 EPS estimate, a premium to its historical average, justified by what we feel is a relatively high potential for upside to our estimates. Risk to the upside include better-than-expected enrollment growth and stronger growth in Medicare Advantage over time. Risks to the downside are worse-than-expected membership growth, rising cost trend, and greater-than-expected HC Reform disruption.