WellPoint, Inc. (WLP), Aetna Inc. (AET): Three Managed Health Care Companies You Should Buy

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Sums of inorganic growth

Aetna Inc. (NYSE:AET)’s subsidiary Schaller Anderson and its joint venture with Mercy Maricopa recently got a $1 billion contract from the State of Arizona. Under this contract, Mercy will cover the benefits of around 68,000 people. Although this contract is a big win for Mercy, it’s not going to be a huge deal for Aetna Inc. (NYSE:AET), as its role will be restricted as an administrator only.

Aetna will receive fees for administration, whereas the premium will be kept by Mercy. From Aetna’s perspective, this deal will only be an addition to its already diversified portfolio. Aetna Inc. (NYSE:AET) will get around $100 million per year from the administration of this program.

On the other hand, it is on the verge of completing its pending acquisition of Coventry Health Care, Inc. (NYSE:CVH). Till now, it has received approval from 20 states out of 21 for this acquisition. This acquisition is would be highly accretive for Aetna, as it will enhance its footprint in government payment systems.

Additionally, Coventry Health Care, Inc. (NYSE:CVH)’s strong presence in individual Medicare advantage will supplement its focus on growth in group Medicare advantage plans. Coventry Health Care, Inc. (NYSE:CVH) is expected to contribute $0.45 to Aetna Inc. (NYSE:AET)’s EPS in 2014. Combining this with the recent CMS Medicare advantage fees revision which will improve profitability, I recommend buying this stock.

An investor’s paradise either ways

With the acquisition of HealthSpring in January 2012, CIGNA Corporation (NYSE:CI) forayed into the fast growing Medicare advantage segment. This acquisition is providing $30 million in annual cost synergies. Most of the cost synergies from this acquisition were realized in 2012, but improvement in profitability was not observed because of the integration costs.

In 2013, the company should see improvement in its bottom line due to this acquisition. CIGNA Corporation (NYSE:CI)’s & HealthSpring’s Medicare program currently accounts for around 23% of its total earnings. With the announcement of the CMS cost revision, the company should show good results in the coming time.

CIGNA Corporation (NYSE:CI) is assessing the fate of its pharmacy benefit manager, or PBM business, and will take a decision by June 30. If it elects to retain the PBM business, it is expected that it would contribute around $325 million annually. And even if it goes for divesting this business, it is estimated that it would fetch around $3.2 billion.

In any case, investors would be benefited in the form of dividends or share buyback. Till now, the company has pending repurchase authority of $815 million, which I feel will be done once the decision on PBM is taken.

Conclusion

Medicare advantage price increase is a positive catalyst for all these three companies.

WellPoint, Inc. (NYSE:WLP) has a huge opportunity from dual eligibility plans, whereas Aetna Inc. (NYSE:AET) will grow from its increased Medicare portfolio including both group and individual plans.

On the other hand, CIGNA Corporation (NYSE:CI)’s pending decision on its PBM business will reward shareholders either in the form of a buyback or increased dividend. Taking these points into consideration, I recommend buying all three stocks.

The article 3 Managed Health Care Companies You Should Buy originally appeared on Fool.com is written by Madhu Dube.

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