Looking Past M&A: The Best Managed Care Stock Plays For The Long Haul

In a report rolled out Wednesday, Jefferies analysts David Windley and David Styblo look into the managed care industry. While the market continues to focus on M&A activity, these experts “zoom out to analyze which MCOs to own for the long haul after the dust settles.”

Assuming the “big 5” consolidate into the “big 3,” the firm believes Anthem Inc ANTM, UnitedHealth Group Inc. UNH and Aetna Inc AET could surge about 50 to 65 percent by summer 2018 on strong EPS accretion. Although all three stocks are Buy rated, Jefferies prefers Anthem and UnitedHealth over Aetna, due to the risk/reward profiles, as Aetna’s acquisition of Humana Inc HUM provides not only strategic benefits, but also, plenty of uncertainty.

The analysts highlight the continued strength of the government pipeline. Of the roughly $35 billion that are likely to be awarded to Medicaid RFI/RFPs over the next 18 months, they estimate $16 billion are “incremental revenue for MCOs,” which will help drive robust growth (2x > Commerical).

In the SMid-cap segment, the analysts upgraded Centene Corp CNC to Buy on the back of the Health Net, Inc. HNT acquisition (which makes the company the largest in Medicaid, and provides it with “deeper penetration in CA, improved capabilities, and opportunity to cross-sell”) and a 10 percent pullback in the stock price. However, they note that Molina Healthcare, Inc. MOH offers more upside potential (about 60 percent, versus Centene’s 50 percent) as its margins and earnings continue to expand.