The Covid-19 pandemic changed the landscape for health insurers. Millions of unemployed people have dropped off commercial coverage rolls. Doctor visits and elective procedures have been put off. Political plans for health-care reform seem to have been tabled until next year.
On this new playing field, Goldman Sachs likes the managed care companies that are big and involved with Medicare supplemental insurance. In a Friday morning note, Goldman put Buy ratings on UnitedHealth Group (ticker: UNH) and Humana (HUM).
“[S]evere and sharp unemployment poses risks from an enrollment and pricing perspective,” writes Goldman’s Robert Jones, “which is all playing out during an election year where the healthcare system will be in even greater focus.”
Jones thinks that shares of the well-established UnitedHealth can go up more than 25% from their current level of $305, to a target price of $38 4. Humana’s stock could rise some 28%, from $396 to $510. He’s neutral on Anthem (ANTM), with its relatively high exposure to commercial health insurance, and sees its $286 stock going no higher than $340.
High unemployment will hurt Anthem, which Jones says has gotten nearly 60% of its pretax earnings from its commercial book of business. But the hit to Anthem’s commercial business will be offset as enrollment rises in its Medicaid programs. All told, the Goldman analyst sees the Covid shock taking no more than 5% of the 2020 earnings he expected, which leaves him predicting $25.18 a share for next year. Putting a 13.5-times multiple on that—which is less than Anthem’s average of 14 times—Jones arrives at his $340 target.
UnitedHealth has been trading at a discount to the S&P 500, says Jones, compared with its typical 4% premium. He thinks that medical claims among its customers will even out over the rest of the year. As more people sign up for Medicare Advantage supplementary coverage, UnitedHealth should benefit. That should lead to solid growth next year and $18.68 a share in earnings, says Jones. With a multiple of 20.5 times that matches the stock’s historical premium to the market, the analyst gets to a price target of $384.
Humana has the largest exposure to the Medicare Advantage business, with more than 80% of its 2019 premiums coming from the fast-growing programs. And that has driven the stock well ahead of the market for years, with Humana’s shares cruising at an average premium of 14% to the S&P’s earnings multiple. Using a 22.8-times multiple on next year’s earnings estimate of $22.29, the Goldman analyst has a price target of $510 on Humana’s stock.
Source: Barrons