Health care reform has caused investors to become anxious about the future of companies tied to the health care industry. These feelings of uncertainty are warranted given that nobody knows exactly what the industry will look like in five or 10 years. However, in some cases investors’ worries are overdone, which has led to cheap companies looking to be scooped up by the enterprising investor.
The future of managed care organizations is particularly up in the air. While some aspects of the health reform legislation is beneficial to the companies, other aspects are detrimental. MCOs will inevitably receive greater oversight from regulators and will have less flexibility in pricing — the question for investors is whether the higher regulatory burden will be enough to dampen future profits to the point where the current stock valuations are warranted.
Uncertainty Breeds Opportunity
Aetna Inc. (NYSE:AET) is an interesting company to look at because of its high degree of uncertainty. Its stock trades at 9 times earnings and 11 times cash flow.
The company faces new taxes and pricing controls from the new health care legislation. But there are other sources of uncertainty in addition to the new regulations. Aetna Inc. (NYSE:AET) has had a mixed underwriting record over the last several years — among the most volatile in its peer group. This is an internal burden that does not affect the company’s competitors — a worrisome sign for potential investors.
However, while many investors fear Aetna Inc. (NYSE:AET)’s poor operating performance — combined with increased regulatory oversight — will crunch the company’s margins, other investors are looking at all of the reasons to buy the stock.
Among other positives, Aetna Inc. (NYSE:AET)’s recent purchase of Coventry Health Care gives it a larger base of customers that will allow it to earn more profit per customer in addition to adding to Aetna Inc. (NYSE:AET)’s bargaining power with providers. Economies of scale and bargaining power are the two keys to MCO’s business model.
In addition, Aetna Inc. (NYSE:AET) can multiply the effect of adding new customers by cross-selling its products. By cross-selling to existing customers, Aetna can grow its revenues per customer at a low cost. As a result, investors should expect more acquisitions in the years ahead.
Aetna faces stiff competition from the likes of WellPoint, Inc. (NYSE:WLP) and UnitedHealth Group Inc. (NYSE:UNH).
WellPoint, Inc. (NYSE:WLP)’s stock price has fallen as a result of concerns about the impact of health care reform on the company’s profitability. Already operating with razor-thin margins, further regulation may make it difficult for WellPoint, Inc. (NYSE:WLP)to compete profitably.