The ongoing COVID-19 pandemic is wreaking havoc on American hospitals. In the past few months, the number of outpatient surgeries decreased by 70% year over year, while patient admissions decreased by 30% to 50% compared to 2019. Each month, U.S. hospitals are operating at an estimated combined $50 billion loss.
While hospitals have suffered dramatically, health insurers have been nothing short of profiting during the pandemic. The large numbers of canceled elective procedures mean health insurers are still collecting premiums while paying out much less in claims, which far outweighs the effects of treating COVID-19 and loss of coverage. Let's look at two health insurance stocks that are the perfect hedge for investors who are anxious about the effects of the COVID-19 pandemic.
A growing insurer
In the first quarter of 2020, Centene's (NYSE:CNC) revenue grew by 41% to $26 billion, primarily driven by its acquisition of WellCare and organic growth from its member count. There are now more than 23.8 million Americans enrolled in Centene's insurance plans. Meanwhile, the company recognized a small decline in earnings due to lower investment income from rock-bottom interest rates. However, it did identify a dramatic decrease in the number of vision and dental claims.
Despite unemployment ramping up dramatically, the company witnessed membership growth in April. It is now guiding for $110 billion to $120 billion in revenues for 2020. In terms of profitability, Centene is also doing well, with an estimate of an additional $2 billion in cash flow from pass-through payments and $500 million in synergies from its WellCare acquisition.
Meanwhile, Centene's stock boasts an expensive 33 times price-to-earnings ratio, but is quite profitable with 10% return-on-equity, and has a reasonable medical loss (payout) ratio of 86%. The company also has $3.5 billion in immediate liquidity if anything goes wrong, and is mildly leveraged with debt accounting for 38.9% of its overall capital. I think Centene will be an impressive growth stock that will deliver riches to healthcare investors for years to come.
A more value-oriented pick
Compared to Centene, Cigna (NYSE:CI) is trading at a cheap valuation of 15 times earnings despite giving guidance that it expects to extend its profit growth in both 2020 and 2021. What gives?
As it turns out, investors are more hesitant about Cigna's prospects, as it is a more diversified health insurance company. In 2018, the company acquired pharmacy benefit manager (PBM) Express Scripts for $54 billion. When it comes to PBMs, the effects of the coronavirus won't be as kind as compared to health insurers.
During the Great Recession, enrollment in Medicaid increased by 30% and will likely occur again for the COVID-19 induced recession. Compounding this growth is the Affordable Care Act drafted by the Obama Administration, which has enrolled 15 million Americans in Medicare in the past five years. Rising Medicare coverage translates to lower profit margins for PBMs as premiums are more lucrative in the private insurance sector. Additionally, now that one in five Americans are unemployed, many more will likely drop out of the PBM system altogether, further affecting Cigna's bottom line.
However, it is essential to note the company has all means of weathering through this segment decline with its core insurance income. The company is guiding for $154 billion to $156 billion in revenue for 2020 and $18 to $18.6 earnings per share. Next year, the company is expecting its profits to soar to between $20 and $21 earnings per share.
In its first quarter, the company brought in $38.4 billion in revenue alone and generated $1.9 billion in operating cash flow. Its debt-to-capital ratio is also at a healthy 44.7% and may get even better as Cigna prepares to divest its Group Disability segment for $5.3 billion in proceeds.