At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
Rating Obamacare
Ten weeks before a presidential election whose outcome promises to either double down on Obamacare or overturn it entirely seems like a strange time be making long-term predictions on the American health-insurance industry. Hearing these predictions come from a Swiss banker might seem a strange source. Yet that's just what Wall Street gave us, as Credit Suisse expanded its coverage of the industry this week with a raft of recommendations on insurers running all the way from Aetna (NYSE: AET ) to United Health Group (NYSE: UNH ) .
Not shirking the challenge, CS skipped the easy call "buy" call on WellPoint (NYSE: WLP ) -- a call most analysts made in the wake of this week's leadership shake-up. But CS did rate pretty much everyone else. United Health got an "outperform" rating, as did Cigna (NYSE: CI ) . Coventry Health (NYSE: CVH ) , soon to be subsumed into Aetna and with its value therefore essentially capped, got a "neutral." Likewise, Centene, Healthnet, Humana, Molina Health Care, and Triple-S Management all earned neutral ratings.
Of the stocks discussed so far, Credit Suisse believes Cigna is the best bargain, benefiting from a "diversified business and strong financial position" that should permit it to grow earnings, or dividends and buybacks -- or both. But in fact, if you look closely at the numbers, it's clear bargains abound:
|
Company
|
P/E Ratio
|
Price-to-Free Cash Flow Ratio
|
Growth Rate
|
| Aetna |
7.6 |
6.2 |
10.5% |
| WellPoint |
8.3 |
8.4 |
10.1% |
| Cigna |
10.4 |
5.6 |
9.9% |
| Triple-S |
10.6 |
3.0 |
11% |
| UnitedHealth |
11.1 |
6.6 |
10.7% |
| Coventry |
12.7 |
8.9 |
7.5% |
| Health Net |
19.8 |
4.3 |
8.7% |
| Centene |
45.7 |
20.7 |
14.8% |
| Molina |
Unprofitable |
4.0 |
15.5% |
A plethora of opportunities to profit
Rectifying CS's sin of omitting WellPoint, and valuing these companies not only on their GAAP earnings but also on their actual free cash flow, a picture begins to emerge of an industry where almost literally "everything's on sale." Of these nine companies, only Coventry and Centene look truly expensive. (And honestly, Coventry should probably be counted out from the get-go, since it's getting taken out). Meanwhile, even UnitedHealth, Health Net, and Molina -- all of which appear overpriced for their growth rates when valued on P/E -- turn out to be cheaper than they look when valued on free cash flow.
The best bargains of all, however, include Aetna and WellPoint -- which Credit Suisse missed -- and Cigna, which it didn't. Both Aetna and WellPoint boast lower P/E ratios and faster growth rates than CS's top pick, and they generate so much free cash that they're arguably even cheaper than they look.
Foolish takeaway
To CS's credit, its top pick also has merit. While it sports a PEG ratio slightly greater than the value investor's gold standard of 1.0, the company's copious free cash flows give it a P/FCF ratio almost twice as cheap. In short, Credit Suisse is right to recommend Cigna as a clear bargain in the health-care space -- but it's far from the only bargain out there.
Which one is the best stock for your portfolio? I'll give you a hint: It's the company that now owns the other health-care insurer company featured in our latest Fool report on four that could skyrocket after the 2012 presidential election. Get your copy here today -- for free.
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