Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Aetna Inc. (AET), UnitedHealth Group Inc. (UNH): Time to Scoop Up This Health Care Company

Page 1 of 2

The passage of Obamacare has created uncertainty in the health care sector. As the landmark health care legislation nears full implementation, many investors still do not know exactly what is in the law, or what impact it will have on companies in the sector. However, the uncertainty has created opportunity for long-term investors.

One area of the health care sector that is particularly uncertain is managed care organizations. Companies like Aetna Inc. (NYSE:AET), WellPoint, Inc. (NYSE:WLP), and UnitedHealth Group Inc. (NYSE:UNH) face increased regulatory oversight and stricter pricing controls as a result of the law. It is difficult to determine to what extent these companies’ earning power will be impaired, but investors who can put forth a well-reasoned estimate will be in the best position to profit from the uncertainty.

Aetna Inc. (NYSE:AET)

Gauging the effect of Obamacare

At 12 times earnings and 13 times 2012 free cash flow, Aetna Inc. (NYSE:AET) is a compelling investment based on trailing results. But, Aetna’s trading discount is not without merit; its volatile underwriting track record is among the worst in the group. If Aetna cannot get a handle on its underwriting performance, it is unclear as to how the company will cope with the increased burden of Obamacare.

Of course, the market is focused on Aetna Inc. (NYSE:AET)’s poor underwriting track record and has failed to notice everything the company has going for it. For instance, the company’s acquisition of Coventry Health Care extends its customer base, thereby increasing its bargaining power with providers. This should offset much of the margin pressure brought on by Obamacare.

At first glance, WellPoint, Inc. (NYSE:WLP) and UnitedHealth Group Inc. (NYSE:UNH) both look more attractive than Aetna Inc. (NYSE:AET); WellPoint trades at just 9 times earnings and 11 times free cash flow, while UnitedHealth trades at 12 times earnings and 10 times free cash flow. However, only one of the two is clearly undervalued.

WellPoint has struggled to grow revenue over the last several years; any additional competition brought on as a result of Obamacare could be devastating to its future earnings power. In addition, the company’s key business partner, Blue Cross and Blue Shield, requires WellPoint, Inc. (NYSE:WLP) to keep an inordinately conservative balance sheet, thereby reducing the risk that management can take in search of profit and decreasing the amount of capital that can be distributed to shareholders.

Meanwhile, UnitedHealth Group Inc. (NYSE:UNH)’s large provider network attracts customers who want greater flexibility. Since UnitedHealth’s product is better than others for many demographics, it attracts a wide customer base. The larger the customer base, the more bargaining power it gains, which enables it to earn higher margins. Higher margins enable it to lower prices, which starts the cycle all over again. Basically, size matters in this industry and UnitedHealth Group Inc. (NYSE:UNH) has it.

Page 1 of 2

Biotech Stock Alert - 20% Guaranteed Return in One Year

Hedge Funds and Insiders Are Piling Into

One of 2015's best hedge funds and two insiders snapped up shares of this medical device stock recently. We believe its transformative and disruptive device will storm the $3+ billion market and help it achieve 500%-1000% gains in 3 years.

Get your FREE REPORT and the details of our 20% return guarantee today.

Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.
Loading Comments...

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 102% in 3 years!! Wondering How?

Download a complete edition of our newsletter for free!