Credit Suisse On Managed Care: Starts Centene, UnitedHealth And Others At Outperform, WellCare At Underperform

• Scott Fidel of Credit Suisse initiated coverage of U.S. Managed Care and Healthcare Facilities on Wednesday with a Neutral sector rating.
• Fidel noted that fundamentals and politics will create a more uncertain trading environment next year after nearly two years of "unbridled investor optimism."
• The analyst added that P/E multiples are well above its long-term trend and EV/EBITDA multiples are slightly above the historical average.

Fidel explained that the managed care and healthcare facilities sectors both generated "superior investment returns" over the past two years as multiples expanded along with a "rising investor sentiment." In addition, investor perception for the group "brightened markedly" around the Affordable Care Act, following by an "unprecedented up-cycle" of M&A activity that "accelerated" into 2015.

However, 2016 is a U.S. presidential election year and managed care and hospital stocks have shown a tendency to be "highly sensitive" to politics and policy coming out of Washington. In fact, the analyst noted that ahead of a major election, P/E multiples for managed care companies and EV/EBITDA multiples for hospitals tend to trade at a discount to their 5-year averages heading into the election day.

Related Link: Credit Suisse Initiates Coverage On Health Care Facilities: HCA, Lifepoint At Outperform, Tenet, Universal Health At Neutral

Fidel said P/E multiples are "well above" the long-term trend in managed care, while EV/EBITDA multiples are "slightly above" the historical average.

"As the hospital stocks have come down from peak valuations seen earlier this year, we see some opportunities for entry points inside this pullback," Fidel wrote. "However, we view above-average leverage entering a year of potentially rising interest rates and increased political uncertainty as key reasons to be on the sidelines for parts of the group, particularly in the context of our relatively cautious broader sentiment on the MCO/Facilities trading outlook heading into 2016."

Initiations And Price Targets

Fidel suggested that investors invest in company-specific investment themes, including: 1) a strong market positioning, 2) margin expansion opportunities, and 3) upside potential from capital deployment.

With that said, the analyst initiated coverage of UnitedHealth Group Inc UNH, HCA Holdings Inc HCA, Centene Corp CNC, and LifePoint Health Inc LPNT with Outperform ratings.

Fidel also initiated coverage of Aetna Inc AET, Humana Inc HUM, Molina Healthcare, Inc. MOH, Tenet Healthcare Corp THC, and Universal Health Services, Inc. UHS with Neutral ratings.

Finally, the lone stock initiated with an Underperform rating was WellCare Health Plans, Inc. WCG.