Cleveland Research Prefers UnitedHealth, Anthem Over Aetna In Healthcare

Cleveland Research prefers UnitedHealth Group Inc UNH and Anthem Inc ANTM over Aetna Inc AET in the healthcare space.

UnitedHealth: Buy, $155 PT

Analyst Steve Willoughby initiated coverage of UnitedHealth with a Buy rating and $155 price target, as his research suggests the company will likely take a number of actions to remain in the public exchange market in 2017, but with a more improved profitability profile.

"Upside in 2016 appears likely given lower utilization, pulling forward of exchange losses, and benefit from some recent regulatory adjustments. We expect the upside to continue in 2017 due to public exchange changes, insurer fee benefits, and significant opportunity for capital deployment," the analyst wrote in a note to clients.

"In the near-term, our research points to utilization trends likely running in-line, if not slightly below, what's been assumed in guidance," the analyst added.

Willoughby also noted that his research indicates OptumRx likely being more competitive given new offerings heading into 2017.

Related Link: Stocks In Healthcare Benefits Group Lower Amid CMS Decision

Anthem: Buy, $170 PT

Meanwhile, Willoughby initiated Anthem with a Buy rating and $170 price target, saying, "We are constructive on ANTM as we see a number of areas of potential upside to current expectations in both the near & longer-term including lower utilization so far this year, likely accretion from the restructuring of its current PBM arrangement, and synergies from the CI deal."

"With the shares trading at only 12.5x our current FY16 EPS estimate of $11.09 ($0.19 above consensus) and 8x our PBM/CI adjusted FY18 estimate of $17.59, we feel the earnings upside potential is not currently reflected in the shares," the analyst noted.

Willoughby added that the longer-term cash flow generation potential of the company appears significant and may not be currently fully appreciated.

Aetna: Neutral, $120 PT

Further, the analyst started coverage of Aetna with a Neutral rating and $120 price target.

"While the company's goal of $11 of EPS in FY18 seems achievable, it comes with enough potential risks," he noted.

The analyst said risks include the acquisition of Humana Inc HUM, which is likely to see the highest level of scrutiny; concerns over the pressure the company is seeing in its commercial business; uncertainty over the future of government rate increases; and the need to tightly manage SG&A in order to achieve earnings targets.

Just a few minutes before the closing bell on Friday, UnitedHealth was down 0.98 percent at $125.63 and Aetna was down 1.35 percent at $108.79, while Anthem was up 0.13 percent at $143.65.