In a previous post I spelled out, why I am buying healthcare stocks for an Obama presidency. In that post I promised to provide three stocks that would benefit from this fact. The first is Aetna Inc.
Aetna (AET)
Aetna, Inc. operates as a diversified health care benefits company primarily in the United States and Canada. The company provides health insurance products and related services, including medical, pharmacy, dental, behavioral health, group life, and disability plans, as well as medical management capabilities and health care management services for Medicaid plans.
Aetna has been making a strong recovery from its annual loss in 2001, showing consistent EPS growth in the following 7 years.
Many of its competitors have gone through troubling acquisitions, while Aetna has built consistent organic operational growth. Much of this has come through the addition of new product offerings and integration among its segments to optimize cross selling.
I am promoting a buy on AET because of its strong operational success and affordable valuation.
Operational Success
In Q2 we learned that AET has already achieved 72% of their full year membership guidance. This should put the wind at their back to meet their full year membership goal of growing medical membership by 50,000 “lives” in 2008.
In 2007, 5.7% of Aetna’s pre-tax income was generated by Medicaid and Medicare healthcare programs. AET is diversifying is revenue streams and seeking to gain greater access to Medicaid and Medicare markets and many analysts estimate that AET could generate over 10% of EBT from these programs in 2008.
Additionally, AET reaffirmed its guidance for full-year 2008 EPS, while other healthcare companies such as Coventry Health Care have had to reduce full year guidance due to cost pressures. AET’s new product offerings, scale, and growth have allowed it to better handle cost pressures.
In my past post, I spoke of the most likely scenario for universal coverage would be for an expansion of the Medicare and Medicaid programs. With AET’s diversification into these growing markets, it will stand to benefit from an Obama presidency.
Valuation
AET trades at 8.9x forward earnings estimates with a PEG of .6 which compares to its industry F P/E multiple of 9.3x. This is the same level in which AET’s valuation bottomed out at in late 2003. I feel that the entire industry will experience a multiple expansion over the next 12-18 months as investors realize that cost pressure will subside and government spending on healthcare will increase. AET should receive the greatest benefit from this multiple expansion due to its strong operational success and growth.
