Managed care companies could have a tough 2014, says Morgan Stanley, as they navigate the reforms hitting healthcare. Its advice: Look for diversification in stocks like Cigna (CI), UnitedHealth (UNH) and Aetna (AET).
Getty Images That’s diversification of business, however, not stocks. Morgan Stanley’s Andrew Schenker and team write:
We favor MCOs with diversified earnings streams and exposure to segments less levered to reform uncertainties. While most MCOs should ultimately benefit under reform, we expect some to be winners and some to be challenged next year given the opportunities for enrollment growth, the potential for margin compression, and execution missteps due to reform. Our proprietary market/pricing model of the commercial, Medicaid, and Medicare spaces give us confidence that our Overweight rated stocks [Aetna, Cigna, and UnitedHealth] are best positioned to: 1) see EPS growth next year and 2) spread reform-related risks across their broader books.
Diversified plays like Aetna, UnitedHealth and Cigna also have the advantage of being cheaper than “Medicaid pure-plays,” trading at 11.6 times forward earnings, versus 20.9 times. “We expect multiples will converge between Medicaid and diversified stocks as the Medicaid pipeline is realized and long-term growth normalizes,” Schenker says. “Therefore, even with the recent outperformance, we think multiples of diversified companies can expand as investors gain comfort that such companies can navigate the Affordable Care Act (ACA) changes and produce earnings growth.”
Aetna has gained 1.3% to $66.79, UnitedHealth has risen 1.4% to $72.97 and Cigna is little changed.
No comments:
Post a Comment