2006 provided some especially trying times for shareholders of four of the mega-cap health insurance providers. Aetna
As we revisit these stocks six months into 2007, we find the ride so far has been much smoother for these blue chips. All four are in positive territory so far, with two outperforming the S&P 500. As was the case in 2006, CIGNA is once again proving to be the top performer in the group, having produced a year-to-date return in excess of 19%. All four companies are expecting their full-year earnings to increase by double digits over FY 2006 results.
Despite rising health-care costs, these companies have been able to maintain healthy margins via a favorable pricing environment, which has enabled each to increase premiums enough to compensate for added costs. WellPoint, for example, noted premium rate increases along all lines of its business during its Q1 earnings conference call.
Share repurchases and membership retention are two other contributing factors to these stocks' favorable returns. The share buybacks have been a common theme in recent quarters and have been positive for increasing shareholder value. All four insurers made large repurchases during Q1, and investors can expect this to remain a continuing trend while earnings remain strong and these stocks have yet to become significantly overpriced.
Membership numbers continue to rise for big health care. All four companies reported increased membership growth for their respective first quarters versus the year-ago quarter. The growth of Medicare Part D plans contributed to slight increases in the medical cost ratios at WellPoint and UnitedHealth during Q1. Aetna also reported a medical cost ratio slightly above its 2006 Q1.
Here is a look at some first-half stats for these stocks:
| Stock |
YTD % Return |
YTD Return vs. S&P 500 |
Earnings Growth (Y-O-Y)** |
|---|---|---|---|
|
Aetna |
15.7% |
9.5% |
19% |
|
CIGNA* |
19.3% |
13.1% |
5% |
|
UnitedHealth |
4.7% |
(1.5%) |
17% |
|
WellPoint |
2.8% |
(3.4%) |
16% |
**Calculated from Q1 '07 vs. Q1 '06.
And here are some selected indicators of how they may perform coming down the home stretch in 2007:
| Stock |
PEG Ratio* |
FY07 Anticipated EPS Growth** |
CAPS Bulls |
|---|---|---|---|
|
Aetna |
0.95 |
16.7% |
91.6% |
|
CIGNA |
1.20 |
8.5% |
91.1% |
|
UnitedHealth |
0.93 |
15.2% |
97.6% |
|
WellPoint |
0.97 |
14.9% |
95.7% |
**For Aetna and Cigna, this calculation is based on operating EPS only.
While it has been a fairly impressive first half for the sector in terms of stock price appreciation, these four continue to remain at reasonable valuation levels based on their PEG ratios. Each company's management team remains bullish for its full-year earnings growth, and our Motley Fool CAPS community is particularly optimistic on these four stocks. The community welcomes contrarian views, however. So check out our intelligence database, which already has more than 30,000 members, and let us know your stance on each of these insurance providers. We will check back in December to see how the second half plays out for big health care.
UnitedHealth is a Stock Advisor selection. Interested in health-care stocks Tom and David Gardner have recommended? Then sign up for a free 30-day trial of Stock Advisor, which is beating the market by more than 37 percentage points. UnitedHealth is also anInside Value recommendation.
Fool contributor Billy Fisher does not own shares of any of the companies mentioned. The Motley Fool's disclosure policy does not tolerate contrarians.
