Humana, Anthem Benefit From 'Attractive' Managed Care Sector, Jefferies Says

Between the potential for government health care reform and new online competition from Amazon.com, Inc. AMZN and others, 2018 could be a notable year for health care stocks. One Wall Street analyst sees more pros than cons in the managed care space.

The Analyst

Jefferies analyst David Windley upgraded Humana Inc HUM from Hold to Buy and raised the price target to $333.

Windley upgraded Anthem Inc ANTM from Hold to Buy and raised the price target to $283.

The Thesis

Managed care stocks stocks could see significant earnings upside over the next three years, Windley said in a Friday note. (See the analyst's track record here.) 

“Growth in government programs, persistent low utilization trends, disciplined pricing and tax reform benefits make MCOs still an attractive sector,” the analyst said. 

Investors should anticipate a series of upward earnings revisions in the space in 2018 — and tax reform could boost EPS potential by up to 34 percent for leading MCO companies, according to Jefferies. 

Humana will see the most EPS tailwind from the federal tax bill of all MCO stocks Jefferies covers, and Medicare Advantage margins could grow to between 4.5 percent and 5 percent for Humana by 2019, Windley said. 

Jefferies has confidence in Humana’s new CEO, and Windey said the company’s new pharmacy benefit manager initiative will produce EPS of around $2.50 by 2021.

In addition to the upgrades of Anthem and Humana, Jefferies maintains Buy ratings on Centene Corp CNC, CIGNA Corporation CI and UnitedHealth Group Inc UNH.

Price Action

Anthem shares closed Friday up 2.05 percent at $239.82, while Humana shares were up 1.04 percent at $268.02 at the close. 

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