Other health insurance companies include Humana Inc. (NYSE:HUM), Cigna Corporation (NYSE:CI), UnitedHealth Group Inc. (NYSE:UNH), and WellPoint, Inc. (NYSE:WLP). WellPoint carries a trailing P/E of 8, while the other three peers all match Aetna at 11 times their trailing earnings. WellPoint had reported an abnormally high growth rate of earnings last quarter compared to the fourth quarter of 2011, with revenue up only slightly. However, Wall Street analysts are quite bullish in the company as they expect that low earnings multiple to hold on a forward basis and the five-year PEG ratio comes out to 0.7. Humana, Cigna, and UnitedHealth, meanwhile, have PEG ratios of about 1 as their recent earnings performance has been about flat (with the exception of Cigna, who recently carried out a large acquisition which has driven both revenue and earnings higher) and analysts seem only moderately optimistic about these companies.
With the industry trading in such a narrow range of earnings multiples, we actually think we might avoid Aetna in favor of its peers seeing as its business has been performing poorly recently. Of course, investors who think that the health insurance industry has too much regulatory risk would likely avoid these companies altogether (since they are all too cheap to be attractive shorts merely on the risk of further regulation). Aetna’s peers trade very much in value ranges and their earnings seem like they might be stable going forward.
Disclosure: I own no shares of any stocks mentioned in this article.