Chicago, IL – April 4, 2025 – Today, Zacks Equity Research discusses UnitedHealth Group Inc. UNH, Humana Inc. HUM and Centene Corp. CNC.
Link: https://www.zacks.com/commentary/2439675/3-hmo-stocks-to-watch-amid-nurse-shortages-high-tech-costs
The U.S. health insurance industry, referred to as Health Maintenance Organization (HMO), is aided by membership growth on the back of attractive, affordable plans and rising Medicare demand, but inflation may hinder premium affordability. To expand capabilities and market presence, HMOs are pursuing mergers and acquisitions, a trend supported by the anticipated rate cuts in 2025, easing financing conditions.
However, they face challenges from persistent healthcare workforce shortages, which may impact care quality and customer retention. To stay competitive, HMOs are heavily investing in telehealth technologies, though these upgrades strain profit margins. Despite these roadblocks, 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.
Workforce Shortages in Healthcare: A persistent shortage of healthcare professionals, including nurses and other clinical staff, continues to hinder the efficient functioning of hospitals, particularly amid rising patient volumes. Factors giving rise to the scarcity include an aging workforce, widespread burnout and uneven staff distribution.
An aging baby boomer population is also contributing to the higher demand for nurses. Since HMOs collaborate with hospitals, doctors and other providers to offer discounted services to their members, maintaining service quality is essential for customer retention and health plan renewals. A scarcity in the healthcare workforce may compromise care delivery, indirectly affecting HMO customer satisfaction and long-term retention.
Rising Technology Costs: The rapid adoption of telehealth services continues to gain momentum, propelled by the broader digitization trends in the healthcare sector. These services, known for their convenience and affordability, are expected to see sustained demand. To remain competitive in this evolving landscape, HMOs are increasingly investing in advanced technology to develop and enhance telehealth platforms.
These platforms enable patients to access care from their homes, thereby improving customer satisfaction and creating a reliable revenue stream. However, the significant costs required for such technological upgrades can place strain on insurers' profit margins.
Expanding Membership Base: HMO industry players devise affordable health plans supplemented with appealing features to attract and retain members. These well-structured offerings earn state and federal contracts, fueling membership growth. As the number of enrollees rises, the companies benefit from higher premium income, a primary revenue source for health insurers.
Additionally, the aging population in the United States continues to drive strong demand for Medicare plans targeting individuals aged 65 and older. Nonetheless, ongoing inflationary trends may affect some consumers' ability to consistently afford premium payments, potentially constraining future growth.
Emphasis on Mergers and Acquisitions: Alongside technological investments, HMOs are actively pursuing mergers and acquisitions (M&A) to expand capabilities, enter new markets, solidify their presence in existing regions, grow their customer base and enhance national reach. These strategic moves also offer diversification advantages that help sustain competitiveness.
In 2024, the Fed cut the interest rate three times. The Fed also hinted at rate cuts in 2025. Lower borrowing costs are likely to make it more accessible for companies to finance M&A deals without heavily drawing down cash reserves.
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 #157, which places it in the bottom 36% of 246 Zacks industries.
Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than two to one. 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 buy or 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 gained 7.2% in the past year compared with the Zacks S&P 500 composite's 10% growth. The Zacks Medical sector fell 7.4% 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 is trading at 15X compared with the S&P 500's 20.59X and the sector's 19.91X.
In the past five years, the industry has traded as high as 19.57X and as low as 14.01X, the median being 16.24X.
We are presenting three stocks from the HMO industry that currently carry a Zacks Rank #2 (Buy) or Zacks Rank #3 (Hold). Considering the current industry scenario, it might be prudent for investors to buy or retain these stocks in their portfolio, 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: Minnesota-based UnitedHealth Group's revenues continue to rise, driven by strong performances from UnitedHealthcare and Optum. The UnitedHealthcare segment benefits from effective Medicare and Medicaid offerings, integrating affordable and attractive features that expand membership and boost premium income. This has led to multiple contract wins for the Zacks Rank #2 company. Optum's growth is fueled by acquisitions, advanced technology and data-driven care models. Strategic M&A and telehealth investments further enhance UNH's nationwide reach and service efficiency.
The Zacks Consensus Estimate for UnitedHealth Group's 2025 earnings is pegged at $29.63 per share, indicating an 7.1% rise from the 2024 figure. UNH's earnings beat estimates in each of the last four quarters, the average being 2.46%.
Humana: Revenues of Humana, based in Kentucky, continue to grow, fueled by rising premiums. A strong Medicare and Medicaid customer base brought 10.7% year-over-year rise in premiums in 2024. Its Insurance segment offers affordable health plans and has secured multiple federal and state contracts. With an aging U.S. population, demand for the Zacks Rank #3 company's Medicare offerings remains strong. Through CenterWell and Conviva Care Center, Humana provides senior-focused primary care in several U.S. states. Strategic acquisitions have enhanced capabilities and diversified income streams.
The Zacks Consensus Estimate for Humana's 2025 earnings is pegged at $16.36 per share, indicating a 0.9% rise from the 2024 figure. HUM's earnings surpassed estimates in each of the last four quarters, the average being 15.35%.
Centene: This Missouri-based company benefits from revenue growth, which, in turn, receives an impetus from a growing customer base in Medicaid and Medicare. As of Dec. 31, 2024, total membership rose 4.1% year over year to 28.6 million. Strong performance in government-sponsored programs has led to contract wins in Illinois, Ohio, Michigan and New Hampshire. Premium and service revenues rose 3.9% year over year in 2024. Its Commercial Marketplace business grew 12.4% to 4.4 million members. Centene also uses acquisitions to expand its reach and divests underperforming units.
The Zacks Consensus Estimate for Centene's 2025 earnings is pegged at $7.07 per share. The consensus estimate for 2025 earnings has been revised 1.7% upward over the past 30 days. CNC's earnings surpassed estimates in three of the last four quarters and missed the mark once, the average beat being 21.78%.
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