Seeking Value and Stability With Healthcare Companies

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Traditionally, the healthcare sector has been regarded as a more defensive play due to its durable and non-cyclical nature. Despite the macro-economic situation, people will always need healthcare, and moreover, this sector will become increasingly important as the West continues to face an aging population. With Obama’s reelection, and his landmark healthcare reform, there are a number of stocks that stand to gain at the moment. In this article I will examine two of these.

Healthcare in Focus

Contrary to many other industries, demand for healthcare services is relatively stable. As the baby boomer generation gets older, the demand for healthcare will increase. Additionally, Medicare reform may boost profits in the long-term due to a larger number of insured patients, although it may be a drag on profit in the first few years according to analysts. Healthcare plan providers would perhaps see the greatest benefit from this reform, and the sector appears inexpensive compared to the broader market with an average P/E of 11.8x earnings.

Humana

Humana (NYSE: HUM), with a market cap of about $10.3 billion and around 40,000 employees, provides medical benefits to over 11 million people. These benefits consist of Medicare, primary care, integrated wellness and pharmacy, as well as dental and vision among other things. In the last two quarters, the company generously beat analyst expectations, and it offers a 3-5 EPS growth rate that is ahead of the industry. Humana announced the takeover of Metropolitan Health Networks last month, which is a good tiding for both companies. Aside from allowing Humana to control costs through scale benefits, the takeover will also allow them to diversify into faster growing markets. Currently, Humana looks priced very inexpensively. The stock trades at only 8.72x earnings and 1.19 to book. The return on equity is quite decent approaching 15%, and debt is reasonable at a total debt to equity of 21.78.

WellCare Health Plans

WellCare (NYSE: WCG) is another US healthcare plan provider with a focus on government-sponsored healthcare programs. The company offers Medicaid plans which assist low-income families with children, and aged, blind or disabled individuals. As such, the company stands to greatly benefit from healthcare reform as the new healthcare laws will expand the number of people applying for this type of assistance, and states may turn to private contractors to handle the influx of new applicants. According to CNBC, the company is looking at a 3-5 year EPS growth rate of 35%, miles ahead of the industry. After lagging the industry in terms of EPS growth for a number of years, the company seems to have turned around significantly in 2011. Currently valued at 9.33x earnings and 1.6 to book, the stock looks like a bargain. Return on equity is a handsome 19.24% and debt is very manageable with a total debt to equity ratio of 10.9.

Bottom Line

Aside from being a traditionally defensive and non-cyclical sector, Healthcare may be an interesting choice in a period of economic turmoil. Moreover, Obama’s healthcare reform may give the sector, especially healthcare plan providers, some upside in the near future. The two companies mentioned in this article appear to be doing well in terms of earnings, and also seem to be valued attractively at the moment. 


DUJames has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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