Oppenheimer Boosting Targets In Healthcare On 'Exposure To Interest Rate Changes'

Shares of CIGNA Corporation CI, Centene Corp CNC and Anthem Inc ANTM are all up about 2 percent on Thursday afternoon, after Oppenheimer boosted its price targets on the stocks.

Very low interest rates have led the managed care group to deliver very low earnings on its large investment portfolio. However, as the economy continues to improve, the Federal Reserve is expected to begin lifting interest rates over the year. This will translate to substantial upside on fiscal 2016 EPS estimates, “as a rising rate environment will drive incremental non-operating earnings growth.”

Oppenheimer notes that “as a rising rate environment will drive “incremental non-operating earnings growth.” The firm thinks CIGNA and Aetna Inc AET “have the highest leverage to interest rates followed by Centene, Humana Inc HUM and Anthem.”

Overall, the analysts believe the group will deliver solid top-line and EPS growth, and stable profitability in the years to come. They highlight four key points to consider when investing in managed care stocks, which they consider to be “attractive.”

1)   Current investment portfolios carry low yields.

2)   Interest rate should increase moderately over the years to come.

3)   Substantial upside remains

4)   CIGNA and Aetna should benefit the most, mainly on the back of leverage to interest rates. “Meanwhile, CNC and UNH could see earlier benefits as they hold a larger portion of their investment portfolios in cash/short-term investments, compared to CI and AET.”