That leaves two ways to play it, big pharmaceutical companies or healthcare services companies. I explored the big pharma sector in another recent article, and today I’d like to look at healthcare services companies, so why not start big with UnitedHealth Group Inc. (NYSE:UNH)
About UnitedHealth Group
UnitedHealth Group provides a range of services, such as HMO’s, point of service (POS) plans, preferred provider organizations (PPOs) and other programs such as Medicaid and Medicare. The company’s total enrollment for health care services was just under 41 million people at the end of 2012, making the company the number one health insurance company by enrollment.
UnitedHealth Group Inc. (NYSE:UNH) has performed well over the past decade, and in fact the company’s revenue has quadrupled over that period (see chart). This is generally expected to continue, as analysts are projecting an 11.5% rise in revenue for 2013.
Why They Will Grow
Looking forward, however, even in the face of uncertainty in the general landscape of healthcare, I think that UnitedHealth and other companies like it will benefit over the next few years. The main reason for this is simple: a rapidly aging population. With a rising Medicare population and the transition of Medicaid beneficiaries into managed health care, UnitedHealth should have no shortage of business going forward.
The company has other upside catalysts as well that should allow them to gain market share, an example of this being the receipt of the U.S. Defense Dept. TRICARE contract. The recent acquisition of Amil Participacoes, Brazil’s largest MCO significantly expands UnitedHealth’s international footprint as well.
Other options
As of the latest data, there are 803 health insurance companies in the U.S., of which UnitedHealth Group Inc. (NYSE:UNH) had the greatest enrollment. Competitors generally include the other large for-profit insurance companies, such as Aetna Inc. (NYSE:AET) and CIGNA Corporation (NYSE:CI).
Aetna offers similar services to UnitedHealth, and is about half of its size with 18.2 million members. They pay a dividend of 1.68% annually, and have only been paying significant dividends for the past few years ($0.04 per share until 2011).
CIGNA Corporation (NYSE:CI) is one of the leaders in employee benefit plans, with 14 million covered lives. They are not much of a dividend payer, however they have performed well for their shareholders lately.
In fact, Cigna has outperformed the other two companies mentioned by a significant amount over the past five years. A $10,000 investment in Cigna exactly five years ago would be worth $13,159 today, assuming all dividends were reinvested. UnitedHealth performed fairly well, and would be worth $12,006 now. Aetna Inc. (NYSE:AET) shareholders actually lost some money, and their $10k would be worth $9,934 today.
Let’s look at the valuation of these companies for a minute. The cheap valuation is one of my favorite things about UnitedHealth, trading at just 10.1 times earnings. According to the consensus, earnings are projected to grow by 10% annually going forward, more than justifying the valuation. In fact, it looks downright cheap.
For comparison purposes, Cigna is projected to grow at a 9% rate and trades at 10.7 times earnings. Aetna Inc. (NYSE:AET) trades at 9.9 times earnings with 8% forward growth. To get one set of numbers to compare the relative valuations of these companies, I’ll take the ratio of the growth rate to the P/E (higher is better) and I arrive at 0.81 for Aetna, 0.84 for Cigna, and 0.99 for United Health.
The bottom line
So, on a valuation and growth rate basis, UnitedHealth Group Inc. (NYSE:UNH) is the “cheapest” investment right now. All three of these are very good, stable companies and are very close in terms of investability. It is also interesting to note that CIGNA Corporation (NYSE:CI) and Aetna Inc. (NYSE:AET) are trading right at or around their 52-week highs, while UnitedHealth is 11.4% off of its high, and is actually just $3 above its low. Any of the three would become very interesting on any pullbacks in share price, however at current levels I think UnitedHealth offers the best value to play the sector.
The article The Best In Health Insurance originally appeared on Fool.com.
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