The government has promised to update us on enrollment data for the Affordable Care Act, which went live last month, and has endured a seemingly endless stream of glitches and criticism. If the early results from exchanges not being run by Washington are any indication, the early victors will be those insurers running state Medicaid programs. So far, Medicaid enrollment has outpaced private enrollment by a 9-to-1 ratio.

A boon to Medicaid insurers
The membership growth has been well forecasted by industry experts who estimate some 9 million people will sign up for Medicaid in 2014. That's a big influx into programs, and positions insurers WellCare Health Plans (NYSE:WCG), Health Net (UNKNOWN:HNT.DL) and Centene (NYSE:CNC) for growth given they're heavily weighted toward the Government program.

But, is one of these insurers a better buy than the other?

WellCare added 10% more people to its customer rolls in the third quarter compared to a year ago. Some of that success came from Kentucky -- a state that signed up more than 25,000 new Medicaid members in October. That's good news for WellCare since it  won a rate increase in Kentucky last year.  WellCare also made inroads in South Carolina and Missouri this year thanks to acquisitions. But, South Carolina hasn't embraced Medicaid expansion, and Missouri is still debating it.

Health Net's membership fell 3.4% to 2.5 million members in the third quarter, masking a 5.3% lift in Medicaid enrollment to 1.1 million members. Health Net's Medicaid membership could climb markedly higher this coming year given Health Net's concentration in California and recent entry into Arizona. Both of those states are participating in Medicaid expansion.

At Centene, sales grew 24% from a year ago in the third quarter thanks to winning a new contract in Kansas and membership growth in Texas. Mississippi and Florida were also strong.  But, none of those states agreed to expand Medicaid. Centene did get approved as a Medicaid provider in Massachusetts, beginning in January, and Centene is also in the California Medicaid market. So, the company should benefit from enrollment growth in those states.

Debating earnings
All three companies get solid marks for under-promising and over-delivering. Each has outpaced the consensus earnings estimate in three of the past four quarters. And, all three have outpaced the street forecast in each of the past two quarters.

Earnings % Surprise


December 2012 

March 2013 

June 2013 

September 2013 






Health Net










Source: Yahoo! Finance. 

Looking at forward earnings estimates, analysts optimism is waning for WellCare and Health Net with estimates dropping for each over the past ninety days.  However, estimates have ticked higher for Centene.

Next-Year EPS Estimates


Current Estimate 

7 Days Ago 

30 Days Ago 

60 Days Ago 

90 Days Ago 







Health Net 












Source: Yahoo! Finance. 

Switching over to profitability, operating margins offer insight into which companies earnings are more likely to benefit from rising revenue.  

WellCare's 3.14% operating margin is higher than Health Net and Centene's operating margins, which were 1.57% and 2% in the third quarter, respectively. Interestingly, all three have seen operating margins expand this year.

WCG Operating Margin (TTM) Chart

WCG Operating Margin (TTM) data by YCharts

Debating valuation
In a nod to their low margin industry, all three companies trade at price to sales ratios below 0.50. And, none are trading near their peak valuation from early 2012.  That suggests there may be more room to move higher. Comparing the three, Health Net investors are paying the least for each dollar of sales, likely because of their low margins and falling earnings estimates.

WCG PS Ratio (TTM) Chart

Source: WellCare PS Ratio data by YCharts.

Investors are also paying the least for Health Net's forward earnings per share. Typically, insurers tend to trade around the mid-teens in terms of earnings multiple. But Health Net is trading at just 11.6 times next years estimates. If we assume investors will be willing to pay 15 times forward earnings estimates for all three companies, Health Net may have the most room for appreciation while Centene appears fairly valued.

Metric WellCareHealth NetCentene
Trailing P/E 16.33 14.42 27.4
Forward P/E 12.55 11.61 15.99
Current Share Price $67.35 $27.98 $58.02
Forward EPS Estimate 5.36 2.41 3.62
Target P/E 15 15 15
Target Price Forward EPS * Target P/E $80.40 $36.15 $54.30
Potential Return 19.38% 29.20% -6.41%

Source: Yahoo! Finance.

The Foolish final conclusion
The expansion of Medicaid offers an opportunity for private insurers within states that have adopted the policy change. That means WellCare, Health Net and Centene all have an opportunity to see membership, and revenue, climb next year.

For investors focused more on earnings, WellCare, with its higher margins, and Centene, with rising earnings estimates appear best. For those favoring value, Health Net appears cheapest of the three. Regardless, if Medicaid enrollment continues to climb, it may present additional opportunity for the industry, suggesting all three may be worth watching.