For immediate release
Chicago, IL – October 18, 2024 – Today, Zacks Equity Research will discuss UnitedHealth Group Inc. UNH, The Cigna Group CI, Humana Inc. HUM, and Molina Healthcare, Inc. MOH.
Industry: HMO
Link: https://www.zacks.com/commentary/2352108/4-hmo-stocks-to-watch-despite-continued-industry-headwinds
The U.S. health insurance industry, known as health maintenance organizations (“HMOs”), is expected to benefit from higher premiums from offering affordable health insurance plans, resulting in increased membership. Demand for Medicare is expected to increase as the U.S. population grows. age. Aggressive mergers and acquisitions (“M&A”) activity, supported by potential interest rate reductions, is contributing to the geographic expansion and diversification of HMOs.
Investing in telemedicine platforms is important as demand for digital healthcare increases, but high technology costs can weigh on profits. Additionally, national medical staff shortages can impact the quality of care and indirectly impact member retention. Despite the challenges, companies like UnitedHealth Group Inc., The Cigna Group, Humana Inc., and Molina Healthcare, Inc. appear well-positioned to counter industry headwinds.
About the industry
The Zacks HMO industry consists of entities (private or public) that are responsible for providing basic and supplementary health care services to their members. Companies in this sector primarily assume risks and allocate premiums to health and medical insurance policies. Industry participants also offer self-insurance administration services and managed care services.
Services are typically provided by a network of approved health care providers (referred to as in-network), including primary care physicians, clinical facilities, hospitals, and specialists. However, out-of-network exceptions occur in emergencies or when necessary. Health insurance plans are available through individual enrollment, social insurance, or social welfare programs.
Four major trends shaping the HMO industry
High technology costs to keep up with the digital era: To adapt to the growing digitalization in all areas of healthcare, the HMO industry is developing virtual healthcare solutions, commonly known as telehealth services. We are making a large investment. The convenience and cost-effectiveness of these services suggests that they are likely to remain in high demand.
To keep pace with the digital shift, HMO companies are being forced to invest in technology to develop telemedicine platforms that allow individuals to access healthcare from their homes. These platforms help attract more customers and generate a steady revenue stream for industry players. However, the technological advances required to support these platforms come at a significant cost and can eat into health insurers' profits.
story continues
Shortage of medical staff: The shortage of nurses and other medical staff continues to be a nationwide problem, impacting the ability of hospitals to efficiently manage growing patient populations. Factors contributing to the nursing shortage include an increase in the number of nurses nearing retirement, increased burnout, and unequal distribution of the workforce. Health insurance companies partner with hospitals, doctors, and other health care providers to offer discounts to plan members.
The quality of care provided will continue to be an important factor for enrollees when renewing their health insurance plans. Nursing workforce shortages can impede hospitals' ability to provide high-quality care and can indirectly impact HMO companies' customer bases.
Increased premiums: Most participants in the HMO sector focus on distributing affordable health plans and upgrading plans with attractive features to attract new members and retain existing members. I'm leaving it there. These enhancements not only enhance customer satisfaction, but also help secure federal or state contracts, which in turn drives membership growth.
Steady growth in membership supports continued premium growth, which remains the largest contributor to health insurance companies' revenues. As the U.S. population ages, demand for Medicare plans specifically designed for individuals age 65 and older is expected to increase consistently over the next several years. However, continued inflationary pressures can pose challenges and strain customers' ability to pay their health insurance premiums on an ongoing basis.
Aggressive M&A activity: Apart from investing in technology, industry players are looking to improve their capabilities, enter new geographies, go deeper into existing geographies, expand their customer base, and expand their national presence. To solidify this sense, they often pursue M&A strategies. These efforts are also aimed at delivering much-needed diversification benefits to remain competitive.
The Fed decided to cut interest rates by 50 basis points at its latest policy meeting. Further rate cuts are likely this year, as cited by multiple sources. This could encourage more companies to seek financing for M&A deals and preserve cash reserves.
The Zacks Industry Rank indicates a bearish outlook.
The group's Zacks Industry Rank, the average Zacks Rank of all member stocks, indicates a lackluster near-term outlook. The Zacks Medical-HMO industry is within the broader Zacks Medical sector. It currently has a Zacks Industry Rank #231, which puts it in the bottom 8% of all 250+ Zacks industries.
Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1. This industry ranks in the bottom 50% of Zacks-ranked industries as a result of negative earnings outlooks among its constituent companies.
Here are some stocks you can hold given their solid growth efforts despite the dire scenario. But before that, it's worth considering the bigger picture of the industry's recent stock market performance and valuation.
Industry underperforms S&P 500 and sectors
The Zacks Medical-HMO industry has declined 0.8% versus the Zacks S&P 500 Composite Index's growth of 34.4% and the Zacks Medical sector's rise of 12.6% over the past year.
Industry current assessment
Based on the trailing 12-month price-to-earnings ratio (P/E), which is commonly used to value healthcare stocks, the Healthcare industry trades at 15.69x, compared to the S&P 500's 22.09x and the sector's 22.75x. .
Over the past five years, the industry has traded as high as 19.57x and as low as 13.07x, with a median of 16.19x.
4 stocks to watch
Here are four stocks from the Zacks Rank #3 (Hold) space. Considering the current industry scenario, it may be wise for investors to keep these stocks in their portfolios as they are well-positioned to generate growth over the long term.
You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
UnitedHealth Group: Minnesota-based UnitedHealth Group benefits from strong performance from its UnitedHealthcare and Optum divisions. UnitedHealthcare supports growth by offering affordable Medicare and Medicaid plans, while Optum leverages acquisitions and advanced technology, market-leading health analytics, innovative care models, and data-driven population health strategies. We are growing by utilizing. UNH's comprehensive telehealth services are built on significant investments and enable the effective delivery of virtual care. Our strong financial foundation supports our aggressive M&A strategy.
UnitedHealth Group's 2024 earnings estimate is set at $27.65 per share, representing 10.1% upside from the 2023 reported value. UNH's earnings have exceeded expectations in each of the past four quarters, averaging 2.84%.
Cigna: Connecticut-based Cigna continues to leverage the strengths of two major growth platforms: Evernorth and Cigna Healthcare. Evernorth's growth is driven by its strong suite of specialty pharmacy services, while Cigna Healthcare benefits from a healthy customer base across the U.S. healthcare sector. Management expects to achieve average annual adjusted EPS growth of 10% to 14% over the long term. Cigna uses acquisitions to enhance its products and enter new markets.
The Zacks Consensus Estimate for Cigna's 2024 earnings is pegged at $28.48 per share, implying growth of 13.5% from the 2023 reported number. CI's earnings have exceeded expectations in each of the past four quarters, averaging 3.83%.
Humana: Headquartered in Kentucky, Humana continues to grow with higher premiums and an expanding customer base. The solid performance of these programs has resulted in numerous contract awards and renewals with both federal and state authorities. Humana is actively addressing the medical needs of the nation's elderly through its CenterWell brand, launched in 2022. Humana has made a series of acquisitions over the years, including Family Physicians Group, iCare, and Inclusa.
The Zacks Consensus Estimate for Humana's 2024 earnings is pegged at $16.12 per share. HUM's profits have exceeded expectations in three of the past four quarters, but it missed the target once.
Molina Healthcare: This California-based health insurance company has developed affordable Medicare and Medicaid plans with a wide range of benefits, which consistently leads to contract wins. These contracts contribute to the steady expansion of MOH's customer base.
Management remains optimistic about achieving long-term premium income growth of 13-15%. Over the years, we have expanded our business portfolio through a series of strategic acquisitions. In July of this year, Molina Healthcare entered into a definitive agreement to acquire ConnectiCare, which is expected to strengthen the health insurer's presence in Connecticut.
The Zacks Consensus Estimate for Molina Healthcare's 2024 earnings is pegged at $23.50 per share, representing an increase of 12.6% from the year-ago reported figure. The Department of Health's profits beat expectations in each of the last four quarters, averaging 3.14%.
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UnitedHealth Group Incorporated (UNH): Free Stock Analysis Report
Humana Inc. (HUM): Free stock price analysis report
Molina Healthcare, Inc (MOH): Free Stock Analysis Report
Cigna Group (CI): Free Stock Analysis Report
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