Chicago, IL – January 13, 2025 – Today, Zacks Equity Research discusses UnitedHealth Group Inc. UNH, Humana Inc. HUM and Centene Corp. CNC.
Link: https://www.zacks.com/commentary/2394877/3-hmo-stocks-poised-to-thrive-despite-industry-headwinds
The U.S. health insurance industry, referred to as Health Maintenance Organization (“HMO”), is poised to benefit from an expanding customer base, ensuring a steady stream of premium income for its participants. Anticipated interest rate cuts in 2025 are likely to revive merger and acquisition (M&A) activity within the sector. While investments in technology aim to enhance operational efficiency, they often lead to increased costs for industry players.
Additionally, the persistent shortage of medical personnel across the United States remains a significant challenge. Despite these hurdles, companies like UnitedHealth Group Inc., Humana Inc. and Centene Corp. appear well-placed to counter industry headwinds.
The Zacks HMO industry consists of entities (either private or public) that take care of subscribers’ basic and supplemental health services. Companies in this space primarily assume risks and assign premiums to health and medical insurance policies. Industry participants also provide administrative and managed-care services for self-funded insurance.
Services are generally offered by a network of approved care providers (called in-network), which include primary care physicians, clinical facilities, hospitals and specialists. However, out-of-network exceptions are made during emergencies or when necessary. Health insurance plans can be availed through private purchases, social insurance or social welfare programs.
These platforms allow individuals to access healthcare from the comfort of their homes, enhancing customer appeal and providing a stable revenue stream for industry players. However, the substantial investments required for these technological advancements can place pressure on health insurers' profit margins.
Shortage of Healthcare Professionals: The nationwide shortage of nurses and other healthcare professionals continues to challenge the efficient operations of hospitals, which face rising patient volumes. Factors such as the aging nursing workforce, high levels of burnout and unequal workforce distribution contribute to this staffing crisis.
HMOs partner with hospitals, physicians and other healthcare providers to offer discounted care to their members. The quality and effectiveness of these services are critical to renewing health plans with customers. A reduced nursing workforce can hinder hospitals' ability to provide high-quality care, indirectly impacting the customer retention abilities of HMOs.
Membership Growth: HMO participants offer cost-effective health plans, often enhancing them with attractive features to draw in new members and retain existing ones. These well-designed plans frequently secure federal or state contracts, driving membership growth. As membership expands, insurers benefit from increased premiums, which represent a significant portion of their revenue.
The aging U.S. population continues to drive demand for Medicare plans tailored to individuals aged 65 and above. However, persistent inflationary pressures could challenge some customers' ability to make uninterrupted premium payments, potentially impacting growth.
Strategic Focus on Mergers and Acquisitions: In addition to technological investments, HMOs frequently pursue M&As to enhance capabilities, expand into new markets, deepen their presence in existing ones, grow their customer base, and strengthen their national footprint. These strategies also provide critical diversification benefits, helping companies maintain a competitive edge.
With anticipated interest rate reductions by the Federal Reserve in 2025, borrowing costs are expected to decline, making it more feasible for industry players to secure loans for M&A activities without depleting cash reserves. J.P. Morgan remains optimistic about M&A activity in 2025.
The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all member stocks, indicates tepid near-term prospects. The Zacks Medical-HMOs industry is housed within the broader Zacks Medical sector. It currently carries a Zacks Industry Rank #227, which places it in the bottom 9% of more than 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. The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of the negative earnings outlook for the constituent companies in aggregate.
Despite the dismal scenario, we will present a few stocks that one can retain, given their solid growth endeavors. But before that, it is worth looking at the industry’s recent stock-market performance and the valuation picture.
The Zacks Medical-HMO industry has declined 7.4% in the past year against the Zacks S&P 500 composite’s 25% growth. The Zacks Medical sector fell 6.7% in the same time frame.
On the basis of the forward 12-month price-to-earnings (P/E) ratio, which is commonly used for valuing medical stocks, the industry trades at 14.8X compared with the S&P 500’s 22.13X and the sector’s 20.34X.
In the past five years, the industry has traded as high as 19.57X and as low as 13.07X, the median being 16.2X.
We present three stocks from the space with a Zacks Rank #3 (Hold). Considering the current industry scenario, it might be prudent for investors to retain these stocks in their portfolios, as these are well-placed to generate growth in the long haul.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
UnitedHealth Group: Headquartered in Minnesota, UnitedHealth Group benefits from strong performances by its UnitedHealthcare and Optum divisions. The UnitedHealthcare unit offers affordable Medicare and Medicaid plans while Optum drives growth through acquisitions and the use of advanced technology, leading health analytics, innovative care delivery, and data-driven population health strategies. Significant investments in telehealth services have enabled UnitedHealth Group to provide effective virtual healthcare solutions. Additionally, its solid financial position supports an active M&A strategy.
The Zacks Consensus Estimate for UnitedHealth Group’s 2025 earnings is pegged at $29.79 per share, indicating a 8% rise from the 2024 estimate. UNH’s earnings beat estimates in each of the last four quarters, the average being 2.84%.
Humana: Based in Kentucky, Humana has sustained its growth driven by increasing premiums in its Medicaid and Medicare segments. The strong performance of these plans has resulted in multiple contract awards and renewed agreements with federal and state agencies. Through its CenterWell brand, Humana remains committed to serve the nation’s elderly population.
The Zacks Consensus Estimate for Humana’s 2025 earnings is pegged at $16.68 per share, indicating a 3.3% rise from the 2024 estimate. HUM’s earnings surpassed estimates in three of the last four quarters and missed the mark once, the average being 0.17%.
Centene: This Missouri-based company benefits on the back of a strong customer base in its Medicaid and Medicare businesses, which, in turn, boosts premiums. The strength of these businesses has given several contract wins to CNC. Management anticipates premium and service revenues within $154-$156 billion for 2025. It pursues mergers and acquisitions to enhance its capabilities.
The Zacks Consensus Estimate for Centene’s 2025 earnings is pegged at $7.04 per share, indicating a 3.3% rise from the 2024 estimate. CNC’s earnings surpassed estimates in three of the last four quarters and missed the mark once, the average beat being 7.13%.
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