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Aetna - Why You Shouldn’t Stop Caring About This Health Care Stock Despite ObamaCare

December 16, 2013 | About:
Victor Selva

Victor Selva

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Aetna Inc. (AET) is a firm that offers traditional and consumer-directed health insurance products and related services — including medical, pharmacy, dental, behavioral health, group life, long-term and disability plans. It provides these benefits to employer and plan sponsor customers in all 50 states, ranging from multisite national accounts to middle-market and small-employer groups.

After Jan. 1, 2014, (or after existing policies expire) it will be one of the firms affected by Obamacare’s new changes to existing insurance plans — along other health insurance companies and health care insurance brokers and customers — in significant ways. Losing money due to new fees, taxes and the new administration costs of keeping up with the ratings, as well as for compromising its customer filtering process, is a risk it will have to take — no matter what.

Next year, earnings are expected to be influenced by headwinds in relation to the Affordable Care Act. However, how strong is this business and how much can we expect it to be affected by President Obama’s changes?

Strategy

Aetna has launched what it has called its “Premium Savings Program” — designed to defer conforming to rules legally — which is being distributed as an outreach program to its brokers. Since the Affordable Care Act (ACA) will increase premiums rather dramatically, customers can achieve noticeable cost savings by choosing a fourth quarter renewal this year. They’ll be able to buy time to re-evaluate their business and plan for the future, not having to sacrifice all the benefits they are receiving under their current coverage in the meantime.

Furthermore, and despite Aetna’s spirited and historic opposition to Obamacare, the firm will also make money from it by offering products for sale on its health insurance exchange market.

Business

Besides its strategy to overcome and survive the changes that the ACA will impose on it, more important is the health of the business. Currently, Aetna Inc. is one of US’s largest care benefits companies, as well as one of its largest insurance and financial organizations. It is the successor to a company formed in 1853, and has now gone from being a health care benefits company to practically a free cash flow machine. This has enabled it to complete significant acquisitions, repurchase shares and offer a decent shareholder dividend yield.

In 2012, the company acquired Coventry Health Care. This allowed it to position itself in a fast-growing health services segment, and an expanding provider network. With this, the firm added several million members, and now serves approximately 36.4 million people with information and resources to help them make better informed decisions about their health care. Having this in mind, if affected by the ACA, Aetna can only expect to benefit from the growth in Medicaid and Medicare segments, as well as a fast-growing health services segment, and an expanding provider network.

Moreover, Aetna is expanding aggressively in international markets, and is targeting Asian markets — India and China — which represent a huge potential growth, more so in the face of increased regulation in the U.S. Also, the firm has its mind set on extending its core health business, and capitalizing on new customer and provider opportunities emerging in the market place. In order to achieve this, it has thus made a considerable investment in products and technology.

Looking at its financials, Aetna currently has a strong balance sheet with low leverage — which is always a positive. In terms of valuation, the stock trades at 13.2 times the company´s earnings, a slight discount in relation to the industry average. Although the challenges forthcoming in 2014 due to the ACA might seem big, Aetna’s business is strong and you shouldn’t stop caring about it.

Aetna (AET) Industry Median CIGNA Corp (CI)
P/E 13.2 14.7 15.6
Mkt. Cap. 24 B - 23.1 B
ROE (%) 15.9 11.2 16.6


Although opinion among hedge funds and investment gurus is quite divided regarding this stock (it seems like it will perform just in line with the market and its peers, same as its valuation and returns), I believe that trailing John Paulson, Steven Cohen and Ray Dalio, among several others that have been adding this stock to their portfolios, does not seem like a bad idea.

Disclosure: Victor Selva holds no position in any stocks mentioned.


Rating: 4.8/5 (4 votes)

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