Deutsche Initiates Coverage On Health Stocks As National Health Insurance Debate Rages On

Deutsche Bank initiated coverage on eight companies in the managed care sector, saying it has a constructive view on industry fundamentals, most notably the long-term growth projected for the Medicare Advantage and Medicaid managed care segments.

The commercial segment trends have been volatile in recent years, mainly due to the launch of coverage provisions under the Affordable Care Act, said analyst Chris Rigg.

"However, we expect trends in the commercial segment, at least among the publicly traded managed care organizations, to begin to stabilize as exposure ACA compliant membership diminishes," the analyst said.

Deutsche Bank expects the fee-for-service Medicare and Medicaid populations will continue to follow a trend toward managed care. The firm estimated that managed care industry premiums totaled $1.5 billion in  2015, and noted that only 30 percent of the total Medicare spending flowed through Medicare Advantage plans. Only 44 percent of Medicaid spending flowed through Managed Care Organizations, or MCOs.

Publicly Traded MCO Has Stewarded Investor Capital Well

Eight publicly traded MCOs have generated cumulative free cash flow, or FCF, of about $145 billion over the last 10 years and have deployed $78.8 billion, or 53 percent of the total capital, on share repurchases, according to Deutsche Bank.

Although leverage has risen to about 42 percent at the end of 2016 from 30 percent in 2007, the firm thinks the group's leverage is reasonable, given the low interest rate environment.

Valuations Are Relatively High

While noting that diversified names have traded at a 9 percent discount to the broader market over the last year, the firm said the discount is now 12 percent. The premium over the broader market for government-sponsored names has fallen to 7 percent from 13 percent historically, the firm said.

MCOs Initiated By Deutsche Bank With A Buy:

• CIGNA Corporation CI
• Centene Corp CNC
• WellCare Health Plans, Inc. WCG
• UnitedHealth Group Inc UNH

MCOs Initiated With A Hold:

• Aetna Inc AET
• Anthem Inc ANTM
• Humana Inc HUM
• Molina Healthcare, Inc. MOH

Cigna Seeing Steadiest Commercial Membership Growth

Cigna's consultative selling process has helped it see the steadiest commercial membership growth in recent years versus its diversified managed care peers, according to Deutsche Bank. 

"We think earnings expectations for the company are low — we see upside to the current 2018 consensus EPS estimate of $10.89, as we estimate it requires only modest net income growth of 3.4 percent if CI deploys $7 billion for share repurchases," Tuesday's note said.

Centene: The Disconnect Between Valuation and Fundamentals

The firm said its constructive view on Centene is based on its view that stable fundamental performance in the legacy Health Net commercial business will drive a positive revaluation of company shares.

"We estimate only 16 percent of Centene's 2017 revenue will be derived from the commercial segment, with the balance coming from areas well-liked by the investment community — Medicaid, Medicare and Specialty."

UnitedHealth: A Core Holding For Healthcare Investors

While terming UnitedHealth as a core holding for healthcare investors, Deutsche  said its business model provides tangible benefits for shareholders in the form of a large stream of unregulated cash flows from Optum and, again through Optum, access to some of the fastest-growing areas in the healthcare services continuum.

WellCare: Margins, Growth And Cash Flow

Deutsche Bank based its constructive outlook on WellCare on margin expansion opportunity, revenue opportunity presented by organic and inorganic growth and the substantial cash flow the company generates.

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