As the population grows older and chronic diseases take a toll on lives, the demand for cutting-edge pharmaceutical drugs, medical devices, and advanced treatments and therapies should continue to rise. Given this backdrop, investing in the healthcare industry would be lucrative.
So, it could be wise to scoop up the shares of fundamentally sound medical stocks Elevance Health, Inc. (ELV), Centene Corporation (CNC), and Molina Healthcare, Inc. (MOH), which are dominating the industry.
Regardless of the market tantrums and high inflation, total health expenditure is expected to continue on an upward trend. The Centers for Medicare and Medicaid Services forecasts that the U.S. healthcare expenditure would grow 5.1% per year to a projected 19.6% share of Gross Domestic Product (GDP) in 2030.
Per the Congressional Budget Office’s (CBO) projections, on average, 73 million people would turn 65 or older over the 2023–2053 period, and thus, generally eligible for Social Security and Medicare and less likely to work.
In addition, increased health awareness fueled by the pandemic, the rapidly aging population, and the innovation in pharmaceuticals and treatments are expected to drive the growth of medical stocks.
Global health expenditure is expected to reach $1,700 per capita in 2026, compared to the 2021 figure of $1,530 per capita in Purchasing Power Parity (PPP). Further, the global health insurance market is expected to reach $2.60 trillion by 2028, growing at a CAGR of 7.2%. Meanwhile, the U.S. individual health insurance market is expected to expand at a CAGR of 6.1% from 2023 to 2030.
Moreover, during economic uncertainty, the healthcare industry can serve as a defensive layer, as individuals usually do not cut back on healthcare spending. The healthcare services market is expected to expand at a CAGR of 9.2%, reaching $17.45 trillion by 2027.
To that end, let’s dig deeper into the fundamentals of the featured stocks.
Elevance Health, Inc. (ELV)
ELV operates as a health benefits company through four segments: Commercial & Specialty Business; Government Business; CarelonRx; and Other. It serves individuals through its medical, digital, pharmacy, behavioral, clinical, and care solutions portfolio.
On July 18, the company’s board of directors declared a third-quarter dividend of $1.48 per share, payable to its shareholders on September 22, 2023. ELV pays a $5.92 per share dividend annually, translating to a 1.30% yield on current prices.
Its dividend payouts have increased at a 16.4% CAGR over the past three years and a 13.7% CAGR over the past five years. Also, it has a record of 11 consecutive years of dividend growth.
ELV’s trailing-12-month EBIT and levered FCF margins of 5.67% and 4.82% are significantly higher than the 0.24% and 0.16% industry averages, respectively. Likewise, its trailing-12-month asset turnover ratio of 1.58x compares to the industry average of 0.38x.
For the fiscal second quarter that ended June 30, 2023, ELV’s total revenue increased 13% year-over-year to $43.67 billion. Its total operating gain rose 12% from the year-ago value to $2.63 billion in the same period. In addition, the company’s adjusted net income came in at $2.15 billion and $9.04, up 10.7% and 13.4% year-over-year, respectively.
Given the strong performance in the year’s first half and momentum, the management expects the net income to be greater than $29.09 per share in 2023 and the adjusted net income to be greater than $32.85 per share.
Street expects ELV’s revenue and EPS for the third quarter (ending September 30, 2023) to increase 7.1% and 12.3% year-over-year to $42.43 billion and $8.46, respectively. Moreover, it has a promising surprise history, as it surpassed the EPS and revenue estimates in all of the trailing four quarters.
The stock has lost marginally over the past three months to close the last trading session at $456.
ELV’s POWR Ratings reflect this promising outlook. It has an overall rating of A, which translates to a Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
Also, it has a B grade for Growth, Value, Stability, Sentiment, and Quality. Out of 12 stocks in the A-rated Medical - Health Insurance industry, it is ranked first.
Click here to see ELV’s rating for Momentum.
Centene Corporation (CNC)
CNC is a multinational healthcare company that provides government-sponsored and commercial healthcare programs, focusing on underinsured and uninsured individuals. It also provides education and outreach programs to inform and assist members in accessing appropriate healthcare services. It operates through the Managed Care and Specialty Services segments.
On August 2, the company announced that it had been named to Fortune’s “Global 500” for 2023, the annual ranking of the top 500 companies worldwide by total revenue. CNC’s inclusion on the list is attributed to its innovative approach to healthcare delivery and strong partnerships to improve health and healthcare for its members.
On July 26, CNC’s Texas subsidiary, Superior HealthPlan, announced it entered into a contract to continue to provide healthcare coverage to the aged, blind, or disabled population in the state’s STAR+PLUS program. The contract is anticipated to begin in September 2024 for a six-year term with a maximum of three additional two-year extensions.
CNC’s trailing-12-month EBIT and levered FCF margins of 3.49% and 5.12% are significantly higher than the 0.24% and 0.16% industry averages, respectively. Likewise, its trailing-12-month asset turnover ratio of 1.69x compares to the industry average of 0.38x
During the second quarter that ended on June 30, 2023, CNC’s total revenue increased 4.6% year-over-year to $37.61 billion. Adjusted net earnings attributable to CNC came in at $1.15 billion and $2.10 per share, up 10.8% and 18.6% year-over-year, respectively. Also, its EBIT amounted to $1.42 billion compared to a year-ago loss of $236 thousand.
Street expects CNC’s EPS for the third quarter ending September 30, 2023, to increase 7.9% year-over-year to $1.40. Its revenue for the current quarter is expected to rise marginally year-over-year to $36.15 billion. Furthermore, it topped the EPS and revenue estimates in each of the trailing four quarters, which is excellent.
CNC’s shares have lost marginally over the past three months to close the last trading session at $63.96.
CNC’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, translating to Buy in our proprietary rating system.
It has an A grade for Value and a B for Growth and Quality. In the same industry, it is ranked #2 of 12 stocks. Click here to see the other ratings of CNC (Momentum, Stability, and Sentiment).
Molina Healthcare, Inc. (MOH)
MOH provides managed healthcare services to low-income families and individuals under the Medicaid and Medicare programs and through the state insurance marketplaces. It operates in four segments: Medicaid; Medicare; Marketplace; and Other.
On August 14, the company announced that the New Mexico Human Services Department (HSD) intends to award a Medicaid managed care contract to its New Mexico health plan, Molina Healthcare of New Mexico. The new contract is expected to have a duration of three years, with potential extensions adding a further five years to the term.
On June 30, MOH announced the acquisition of Bright HealthCare’s California Medicare business for approximately $510 million, representing 28% of the expected 2023 premium revenue of $1.8 billion. The transaction expands the company’s Medicare presence in California and is expected to add $1.00 per share to new store-embedded earnings, bringing the expected total to $5.50 per share.
Joe Zubretsky, President and Chief Executive Officer of MOH, commented, “These additions fit perfectly with our strategy of serving high-acuity, low-income members and represent a textbook execution of our growth playbook. We acquire viable assets at attractive valuations, then deploy our proven team of operators to deliver improved financial results.”
The stock’s trailing-12-month EBIT and levered FCF margins of 4.88% and 2.76% are significantly higher than the 0.24% and 0.16% industry averages, respectively. Likewise, its trailing-12-month asset turnover ratio of 2.43x compares to the industry average of 0.38x.
MOH’s total revenue increased 3.4% year-over-year to $8.33 billion in the fiscal second quarter (ended June 30, 2023). Its operating income grew 22.7% from the year-ago value to $443 million. The company’s adjusted net income increased 22.9% from the same period in the prior year to $327 million, while its adjusted EPS came in at $5.65, representing a 24.2% increase year-over-year.
In addition, the company increased its full-year 2023 adjusted earnings per share guidance to at least $20.75, compared to the previous guidance of at least $20.25 per diluted share.
The consensus EPS estimate of $4.88 for the third quarter ending September 30, 2023, represents an 11.8% improvement year-over-year. The consensus revenue estimate of $8.23 billion for the ongoing quarter indicates a 3.8% increase from the prior-year period. The company has an excellent earnings surprise history, surpassing the consensus EPS estimates in each of its trailing four quarters.
Over the past three months, the stock has gained 12.9% to close the last trading session at $318.07.
It’s no surprise that the stock has an overall B rating, which translates to Buy in our proprietary rating system.
It also has a B grade for Value and Quality. Within the same A-rated industry, it is ranked #3. To see additional POWR Ratings of MOH for Growth, Momentum, Stability, and Sentiment, click here.
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ELV shares were trading at $455.68 per share on Friday afternoon, down $0.32 (-0.07%). Year-to-date, ELV has declined -10.60%, versus a 15.24% rise in the benchmark S&P 500 index during the same period.
About the Author: Shweta Kumari
Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.
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