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J.P. Morgan says big managed care deals likely to receive DOJ blessing

Written by Jasir Jawaid

J.P. Morgan on Sept. 16 initiated coverage of seven managed care companies and said that it sees opportunities for enrollment growth in the sector.

The American Hospital Association has called on the U.S. Department of Justice to closely scrutinize mega deals in the sector, including those between Aetna and Humana and Anthem and Cigna, arguing that they could hurt competition. However, analyst Gary Taylor thinks that the deals will most likely receive the regulator's blessings with local divestitures.

He started coverage on these four companies at "overweight."

Taylor thinks that Aetna Inc.'s tie-up with Humana Inc. not only will complement the former's organic revenue and earnings growth, but also will make it the fourth-largest player in the pharmacy benefit management space. He sees a favorable risk/reward opportunity for investors since Aetna's stock is undervalued on a stand-alone basis.

Taylor said Humana should see positive rate growth in 2016 and 2017 Medicare Advantage plans, which will result in accelerated enrollment growth. He sees the company as fairly valued on a stand-alone basis but since the deal has a 70% chance of getting approved by the Justice Department, the stock still offers a compelling risk/reward opportunity.

The analyst expects that the pending deal with Cigna Corp. will accelerate Anthem Inc.'s revenue and earnings growth rates. He sees the stock as attractive on a stand-alone basis and thinks Anthem can deliver double-digit earnings growth while returning capital to shareholders over the next three to five years. Taylor noted that Cigna should be able to capitalize on small employers moving away from risk products toward self-funded arrangements.

UnitedHealth Group Inc., the only managed care company in the so-called "Big Five" that did not participate in consolidation, is poised to benefit from the growth of Medicare Advantage plans. He expects Medicare Advantage enrollment growth to remain in at least the 6% to 8% range over the next several years. The company should benefit organically as competitors are busy with closing, divesting and integrating recent acquisitions. Taylor initiated coverage of UnitedHealth at "overweight" as well.

The analyst wrote that the transformation of the U.S. health care delivery system over the next three years favors entities positioned to reduce per-capita health care spending.

Taylor said that Molina Healthcare Inc.'s pure play Medicaid positioning will help it to benefit from the ongoing Medicaid expansion in different states. He rated the stock at "neutral" and noted that the company's recent earnings power was generated by "extremely favorable and unsustainable" profitability in its health care exchange and Medicaid-expansion populations.

The analyst noted WellCare Health Plans Inc.'s improving results and recent actions taken in a bid to recover margins and improve earnings quality. The company began offering individual health plans via marketplace exchanges for the first time in January, but the exchanges are an avenue of potential future growth for the company, he wrote. The stock was initiated at "neutral."

Taylor's price targets are $97 for WellCare, $84 for Molina, $144 for Aetna, $188 for Anthem, $175 for Cigna, $210 for Humana and $150 for UnitedHealth Group.

This article was published by S&P Global Market Intelligence on the S&P Capital IQ Pro platform.


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