Healthcare Provider (IHF) shares are currently trading at low P/E ratios, but should be valued closer to book value when taking into account contracting margins, high competition, and macro worries for the sector.
There are reasons to worry for many of the healthcare providers as the weak economy has employers looking for cheaper plans, and rising unemployment is hurting enrollment rates. In the late 1990’s there was an intensifying price war in the industry that resulted in record low margins, and it is looking like we could have déjà -vu.
Furthermore, with the Presidential election coming and Democrat Barrack Obama having a tremendous lead in the polls, his socialist agenda could be ill-laden news for the HMO stocks. And, even if McCain were to win, he is not viewed as much of a benefit for the industry.
These worries are flowing through the minds of traders as Friday saw put volume of 107,111 versus call volume of only 32,599 for the 14 healthcare plan providers. The most bearish positioning was in Humana (HUM), Health Net (
HNT,
Financial), Wellpoint (
WLP,
Financial), and Coventry (
CVH,
Financial). Aetnaa (AET), Cigna (CI), and United Health (UNH) actually had put-to-call ratios of less than 1.
Fundamentally, shares are trading very cheap when looking at earnings and growth forecasts, but that is not to say the shares can not get cheaper. Looking a price to book ratios, there is reason to believe that shares should be trading at a lower multiple, because there are as many concerns in this industry as we have previously seen with auto makers and financials. As a sector, healthcare (XLV), is trading at the highest Price/Book multiple versus all other sectors at 2.72, around 40% higher than the next closest sector, technology at 1.93.
Looking to individual stocks in the group and various metrics (See table below), Magellan (MGLN), Molina (MOH), and WellCare (WCG) appear to be the most over-valued and best targets to short.
| Ticker | Price | Forward P/E | PEG | P/B | EPS growth next year | ROA | ROE | LT Debt/Equity | Operating Margin | Performance (Year) |
| AET | 30.98 | 6.96 | 0.58 | 1.51 | 11.25% | 4.21% | 19.16% | 0.32 | 9.57% | -42.43% |
| AGP | 18.56 | 7.48 | | 1.27 | 5.53% | -3.22% | -8.10% | 0.47 | -0.44% | -45.32% |
| CI | 25.22 | 5.33 | 0.68 | 1.46 | 13.70% | 2.30% | 21.77% | 0.44 | 7.52% | -52.58% |
| CNC | 20.18 | 10.09 | 1.07 | 1.9 | 4.17% | 5.57% | 14.83% | 0.48 | 2.77% | -8.27% |
| CVH | 27.78 | 6.76 | 0.71 | 1.27 | 12.30% | 8.29% | 17.97% | 0.44 | 7.57% | -54.34% |
| HNT | 17.66 | 5.47 | 3.13 | 1.06 | 16.19% | 1.12% | 2.90% | 0.37 | 0.90% | -65.86% |
| HS | 18.1 | 7.97 | 0.79 | 1.43 | 7.58% | 8.66% | 16.55% | 0.36 | 8.78% | -10.88% |
| HUM | 35.8 | 6.09 | 0.51 | 1.44 | 34.86% | 6.36% | 22.05% | 0.39 | 5.03% | -51.62% |
| MGLN | 36.8 | 16.21 | 1.25 | 1.54 | 11.27% | 6.94% | 10.62% | 0 | 6.13% | -12.38% |
| MOH | 25.32 | 10.21 | 0.81 | 1.41 | 8.77% | 6.22% | 13.83% | 0.41 | 4.05% | -30.48% |
| UAM | 9.42 | 5.67 | 2.23 | 0.52 | 2.50% | | | | | -61.44% |
| UNH | 24.39 | 7.87 | 0.82 | 1.49 | 4.73% | 6.66% | 17.10% | 0.55 | 7.58% | -49.25% |
| WCG | 27.2 | 5.84 | 0.38 | 1.67 | -7.54% | 9.23% | 31.98% | 0.23 | 6.15% | -76.78% |
| WLP | 40.3 | 6.62 | 0.61 | 0.97 | 10.73% | 5.83% | 13.26% | 0.46 | 8.45% | -49.41% |
