All's Well at Wellpoint

07/11/2013 9:45 am EST

Focus: STOCKS

Trading at a very compelling valuation, this managed healthcare firm is well-positioned for the changing healthcare environment, says Cathy Hetrick of InvesTech Research.

As one of the nation’s largest health benefits companies, WellPoint (WLP) is well positioned to handle the rapidly changing healthcare environment under the Affordable Care Act (ACA).

The firm serves more than 36 million members in its health plans and nearly 67 million individuals through its affiliated and specialty subsidiaries. It is also an independent licensee for the Blue Cross/Blue Shield Association (BC/BS) and is the largest BC/BS plan provider in the US.

WellPoint’s products are well diversified, ranging from large commercial plans designed for multi-state businesses to individual insurance and a variety of niche products including vision and dental and administrative services.

In the past three years, the firm has expanded its market reach by acquiring two specialized companies: CareMore Health Group, serving the Medicare segment, and Amerigroup, a leading managed care company focused on Medicaid.

On January 1, 2014, the primary changes under the Affordable Care Act are scheduled to be implemented (in particular the launching of new health insurance exchanges in each state and the expansion of Medicaid); WellPoint plans to be an active participant.

Full implementation of the Act is expected to add up to 30 million new participants to the health insurance rolls, and many will be federally subsidized. WellPoint appears to be ahead of the game as it already has insurance products in place that meet the strict standards required by the new exchanges.

Also the BC/BS brand is widely recognized and trusted in the US, so the company shouldn’t have to offer its products at the lowest price point to gain ample market share. In the 14 states where WellPoint plans to compete initially, BC/BS already has a substantial presence.

Moreover, the firm’s national scale, technology infrastructure, and current dominance in its primary markets should help drive cost efficiencies and maximize profits.

Perhaps most important to WellPoint is the news that the firm has recently changed leadership, which should result in stronger growth going forward. Under its former CEO, Angela Braly (who left the firm in August of last year), WellPoint suffered a series of missteps, which curtailed revenue and income growth in recent years.

The new CEO, Joe Swedish, comes from the healthcare provider side and his broad experience will be critical in forging relationships between insurer and provider that are necessary to survive the upcoming changes in the system.

In spite of the missteps mentioned above, the firm has averaged 7.5% earnings growth over the past five years. With changes already underway, the new management team projects a return to double-digit EPS growth over the next five years.

From a valuation standpoint, WellPoint is selling at a price-to-earnings ratio of only 9.9. Not only is this a discount to its 10-year median (10.7) and significantly below the levels maintained prior to 2008, but it is far less than the average 12.2 median P/E of its peers.

As a member of the healthcare sector, WellPoint should be inherently resilient to rising interest rates—a common concern in today’s environment.

It has a strong balance sheet with only moderate debt due to recent acquisitions, and it sells health insurance products that, after this year, will be a required purchase for the majority of US citizens.

Thus, we find this an excellent opportunity to purchase a premier managed health care company in an interest rate resilient industry that is not only positioned for a turnaround and return to growth, but selling at a very compelling valuation.

Subscribe to InvesTech Market Analyst here…

More from MoneyShow.com:

Healthcare: Buy, Sell, or Hold?

Stocks in 4 Separate Growth Sectors

A Winner Under Obamacare

Related Articles on STOCKS