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Triple Play In Managed Care

 June 04, 2012 01:40 PM

by Richard Moroney, editeor Dow Theory Forecasts

Wall Street's concerns over patent expirations and regulatory roadblocks are legitimate but don't negate long-term, overarching themes in the sector's favor: the aging population, longer life spans, and early diagnosis.

Many health-care stock offer solid growth potential at an attractive valuation. And managed-care companies look particularly appealing. Here's a look at three buys in the sector.

Aetna (AET) has slumped 18% since declaring March-quarter results April 26. The insurer posted its strongest sales growth in nine quarters, while per-share operating earnings rose 18% and operating cash ?ow surged 78%.

At the same time it declared earnings, Aetna reiterated its 2012 pro?t guidance and suggested it might pursue a more aggressive buyback strategy than previously planned for the last nine months of the year.

The company expects to add 300,000 customers this year, bringing membership to 18.2 million.  

The pullback leaves shares looking cheap at just eight times trailing earnings, 22% below their ?ve-year average P/E ratio and 20% below the median for managed-care stocks in the S&P 1500 Index. Earning a Value score of 93, Aetna is a Focus List Buy.

UnitedHealth Group (UNH) enjoys an attractive blend of strong operating growth, improving outlook, cheap valuation, and favorable share-price action. All six Quadrix category scores are above 55, while both sector-speci?c ranks exceed 96.

With 39.8 million members, the insurer is a steady grower, producing eight straight quarters of at least 6% higher sales. Operating cash ? ow has advanced in 12 of the last 15 quarters.

UnitedHealth enrolled 1 million new customers in the March quarter — roughly in line with the company's prior expectations for the full year. Now, UnitedHealth sees membership up by 1.7 million to 1.9 million in 2012.

At 11 times estimated 2012 earnings, the stock trades 19% below the median for S&P 1500 health-care stocks. UnitedHealth Group is a Long-Term Buy.

WellCare Health Plans (WCG) is positioned to benefit if the Supreme Court upholds health-care reform in its current state.

As proposed, the mandatory insurance would extend coverage to an additional 30 million people, split about evenly between Medicaid and commercial plans.

A provider of managed-care services with more than 2.5 million members, WellCare draws about 60% of its revenue from Medicare and 40% from Medicaid.

Last month, WellCare agreed to pay more than $137 million to settle law-suits related to overbilling Medicare and Medicaid. In the wake of the settlement, WellCare may look more attractive to a larger managed-care company seeking to boost its exposure to Medicare and Medicaid.

However, we don't expect much takeover activity in the group until a Supreme Court ruling on the Affordable Care Act, expected in June or July.

The stock's Overall score and both sector-speci?c ranks exceed 95. The stock is attractively valued at eight times trailing earnings, 40% below its three-year average and 17% below its peer-group median.

With a market value of $2.42 billion, WellCare is a Best Buy. The stock is volatile, and more risky than our typical recommendation.



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