September 16, 2019
Ahead
of the U.S. 2020 presidential election, some investors are concerned that
discussions regarding healthcare reform could take a toll on both share prices
and valuations. That being said, one analyst believes that compelling
investment opportunities can still be found within the managed care space.
Managed care refers to various healthcare plans that try to reduce costs by
controlling the type and level of services provided.
Deutsche
Bank’s George Hill just initiated coverage on 3 healthcare
stocks, giving each a Buy rating based on their “attractive” potential for
growth on September 11.
Using
the TipRanks Stock Comparison tool, we compared how the stocks measure
up against each other based on year-to-date gain, analyst consensus as well as
average analyst price target. Each of these stocks has amassed significant
support from other Wall Street analysts with a “Strong Buy” analyst consensus.
This is based on the last three months’ worth of ratings from the rest of the
Street.
Let’s
dive in.
CVS Health
CVS Health
(CVS- Get Report) provides health plans and services under three
segments that include pharmacy services, retail and long-term care as well as
health care benefits.
Out of
the three healthcare stocks on our list, Hill cites CVS as his top pick based
on its level of diversification. While shares are down 2% year-to-date, CVS has
slowly but surely been working its way back up gaining 18% in the last three
months. With all that the drug store and pharmacy chain has going for it, Hill
sees even more growth on the way.
It has
about 10,000 pharmacies across the U.S. and plans to open 1,500 HealthHub
stores by the end of 2021. He also highlights its integrated care delivery,
which can improve beneficiary care as well as cut costs.
That
being said, a significant portion of its revenue is generated from its
non-managed care organization (MCO) segments. CVS’ non-MCO businesses include
the largest PBM, the second-largest pharmacy chain, long-term care and other
services.
While
some investors originally expressed concerns regarding its $70 billion
acquisition of health insurer Aetna in 2018, management has tried to mitigate
any fears. On June 4, the company conveyed that once the two companies are
fully integrated, it could see low-double digit percent earnings growth by
2022.
Hill
argues that the company is poised to meet its guidance based on its business
strategy. “We see the company as well positioned to deliver on a vertical
integration care delivery strategy, allowing the company to take share and
generate positive earnings surprise. We also see the valuation of CVS shares as
highly compelling and capturing potential execution and integration risks,” he
explained. As a result, the three-star analyst initiated coverage with a Buy
and set a $91 price target, suggesting 42% upside.
All in
all, the rest of the Street takes a similar position. CVS boasts a ‘Strong Buy’
analyst consensus and a $72 average price target, indicating 13% upside
potential, the lowest on the list.
Anthem Inc.
While
shares of the health insurer have slid 3% year-to-date, Hill tells investors
that the dip in Anthem (ANTM- Get Report) presents a unique buying opportunity.
Recently,
Anthem has attracted attention for its new PBM strategy. The company announced
in March that its PBM, IngenioRX, will be more transparent and
customer-friendly, with the new PBM passing along rebates to pharmacy
customers. Traditional PBMs get rebate payments from drug manufacturers in
exchange for placing medications on PBMs’ lists of covered drugs, or
formularies. According to management, this new strategy could reduce costs and
simplify services.
It
should be noted that IngenioRx is the product of its partnership with CVS that
involves a five-year agreement signed back in 2017. CVS has its own Caremark
PBM, and only processes claims and handles tasks related to prescription
fulfillment for IngenioRX. Anthem has full control over clinical strategy and
decides which drugs are covered.
In
addition to revamping its PBM strategy, its 2018 acquisitions of Aspire Health
and America’s 1st Choice as well as HealthSun in 2017 are
expected to drive substantial Medicare Advantage growth. Medicare Advantage
plans are an alternative to original medicare that let beneficiaries choose to
get their coverage through private insurance companies that contract with
Medicare.
While
all of the above supports a strong long-term growth narrative, Hill notes that
there are some risks associated with Anthem. “While execution has been strong
recently, we see some implementation risk on the company’s PBM strategy, risk
to the company’s Medicare Advantage growth targets, less exposure to
faster-growing segments of the market and a rich relative valuation,” he
stated. Nonetheless, the potential reward outweighs this risk. With his
coverage initiation, Hill set a $323 price target which implies 28% upside.
With 7
Buy ratings vs no Holds or Sells received in the last three months, the word on
the Street is that ANTM is a ‘Strong Buy’. Its $345 average price target
demonstrates the potential for 36% upside, the highest on our list.
Cigna Corporation
As
Cigna (CI- Get Report) shares have declined 15% year-to-date, the
Deutsche Bank analyst argues that shares are now trading at a discount.
Some
investors have expressed concerns that the health insurance company is
overexposed in both the PBM and commercial business space. In December 2018, CI
finalized its $67 billion merger with PBM Express Scripts in order to expand
its reach within the sector.
The
merger could be a problem for CI as regulations have been proposed that would
impair the PBM business model. This poses a major threat to CI as its primary
non-MCO revenue comes from large PBMs. While no legislation has been passed
yet, there is always a possibility that this could change.
A
significant portion of CI’s revenue is also generated from its commercial
products. The commercial MCO space includes risk-bearing insurance and
administrative services only (ASO). Hill states that while this space can be
more profitable, it is slower growing than the government-pay business as the
commercial business is largely stagnant.
While
acknowledging that Cigna is behind the curve in terms of its reach within the
government-pay space, he still believes the stock is poised to soar. “We view
Cigna’s PBM segment earnings as not having significant short-term earnings risk
and the company’s diversified earnings stream as undeserving of the steep
discount applied to the shares in the wake of the Express Scripts merger,” he
explained. As a result, the analyst initiated coverage with a Buy and set a
$207 price target. The price target reflects his confidence in CI’s ability to
surge 29% over the next twelve months.
Wall
Street seems to agree with Hill. CI has only been assigned Buy ratings in the
last three months. Its average price target of $214 indicates 33% upside
potential, falling just short of ANTM’s.
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