ANTM Or AET: Which Is A Better Pick In Booming HMO Industry?

The health insurers had a solid run last year thanks to increasing enrollment, product development, business diversification, cost control efforts, increased operating efficiencies and a strong capital position. All these led to top line and bottom-line growth for most of the players. Nevertheless, higher medical costs, public exchange woes, stiff competition, stringent regulations and compliance costs were a drag.

2018 Looks Promising

Despite continued uncertainty surrounding the efforts to repeal and replace Obamacare, the industry is expected to continue performing well in 2018. We see potential for sustained growth in expanding government programs. Increasing focus on preventive and value-based care, growing accountable care organizations, international business expansion, mergers and acquisitions will keep the industry’s growth trend alive.

A Top Ranked Industry

The health insurance industry therefore looks attractive from an investment perspective. The Medical HMO carries a Zacks Industry Rank #24 (top 9% of the 250 plus Zacks industries). Our back-testing shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than two to one.

Here we focus on two top health insurers, Anthem Inc. (NYSE:ANTM) and Aetna Inc. (NYSE:AET) .

Anthem is one of the largest publicly-traded managed care organizations in terms of membership with market capitalization of $58.33 billion. On the other hand, Aetna, with market capitalization of $58.24 billion, is an American managed health care company, engaged in selling traditional and consumer directed health care insurance plans and related services. It is expected to be acquired by CVS Health (NYSE:CVS) in the second half of 2018, per a definitive merger agreement.

It will be interesting to note which stock is better positioned in terms of fundamentals.

Some top-ranked stocks in the industry are Centene Corp. (NYSE:CNC) and Magellan Health, Inc. (NASDAQ:MGLN) , both sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here .

Zacks Rank

While Aetna carries a Zacks Rank #3 (Hold), Anthem has an edge with a Zacks Rank #2 (Buy).

VGM Score

Both Aetna and Anthem have a VGM Score of A. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of all three factors. Both of the companies score equally on this ground.

Price Performance

Both the companies have outperformed the industry in a year. While shares of Anthem have rallied 61.5%, Aetna stock has surged 50.6%. Here, Anthem performs better than Aetna.

Valuation

The price-to-earnings (P/E) value metric is the best multiple used for valuing health insurers. Compared with the industry’s trailing 12-month P/E ratio of 21.7, both Anthem and Aetna are undervalued. Yet, with a trailing 12-month P/E multiple of 18, Aetna is relatively cheaper than Anthem’s trailing 12-month P/E multiple of 19.2. This round clearly goes to Aetna.

Moreover, the price-to-earnings growth (PEG) ratio also remains biased toward Aetna. Aetna has a trailing 12-month PEG ratio of 1.60 while Anthem has the same of 1.69. However, both look overpriced when compared to the industry average of 1.50.

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Dividend Yield

Both Anthem and Aetna have been deploying capital in terms of dividend payments to enhance shareholders’ value. They also maintain a record of raising dividends at regular intervals.

Anthem has a current dividend yield of 1.17% and a five-year growth rate of 21.1%, while Aetna has a dividend yield of 1.09% and a five-year growth rate of 9.9%.

Both the stocks’ dividend yield is higher than the industry’s average of 1.07%. Comparatively, Anthem has an edge over Aetna here.

Leverage Ratio

Both Anthem and Aetna have higher debt-to-equity ratio compared with the industry average of 58.5. However, Anthem, with a leverage ratio of 59.4, has an edge over Aetna with the same of 64.2.

Earnings Surprise History

Considering a comprehensive earnings history, both Anthem and Aetna delivered positive surprises in each of the prior four quarters. While Anthem has an average earnings surprise of 11.5%, Aetna stands out with an average earnings surprise of 23.1%.

Hence, Aetna scores over Anthem in this context.

Earnings Estimate Revisions & Growth Projections

Anthem has seen the Zacks Consensus Estimate for 2018 earnings being revised upward by 0.02%, over the last 60 days. On the other hand, the same for Aetna has moved upward for 2018 by 1.1%, over the same time frame.

For Anthem, the consensus mark for earnings per share is pegged at $13.21 for 2018, representing year-over-year growth of 10.4%. The stock has long-term expected earnings per share growth rate of 10.7%.

For Aetna, the Zacks Consensus Estimate for earnings per share stands at $10.23 for 2018, reflecting a year-over-year increase of 4.6%. The stock has long-term expected earnings per share growth rate of 11.2%.

This round is slightly biased toward Aetna.

Conclusion

Anthem is poised better than Aetna when considering rank, price performance, leverage ratio and dividend yield. However, Aetna wins on valuation, earnings surprise history and earnings estimate revisions & growth projections.

Our comparative analysis shows that Anthem presently has an advantage over Aetna and is a better investment option.

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Written By: Zacks Investment Research