Stifel Looks to Future of Healthcare Under Trump Administration (CNC) (ANTM) (CI) (UNH) (AET) (HUM)

November 21, 2016 11:27 AM EST
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Stifel examined the possibilities and consequences surrounding the healthcare markets following the surprise Donald Trump victory. Stifel analysts say that the Trump victory does not change their expected course of events but may accelerate them as changes to the Affordable Care Act (ACA) are ushered in sooner than expected. Their analysts believe that the end of the decade will bring a fresh round of debate surrounding healthcare reform. But make no mistake, healthcare will continue to be a very fertile area for investment.

Stifel analyst Thomas Carroll commented, "Regardless of who won the White House or controlled Congress, the ACA was a law that was going to require change. This was evident to anyone who understood the complexities of the health system, and became visible to those that didn't in the past year. While providing coverage to many through both Medicaid expansion and reform of the individual market, the legislation did little to the inefficient delivery system of hospitals and doctors that would provide the care. Costs have continued to rise while system volatility increased. After a few years of operation, these problems are emerging and the conversation for change has begun."

It is expected that Trump's changes could make the current health system problems worse and catalyze a quicker move to an amended ACA, brand new legislation, or, ironically, open a conversation to single payer system. A swift reversal of Medicaid expansion, abolishment of the mandate, and keeping guaranteed issue would increase the uninsured ranks, challenge hospitals, drive even bigger premium increases, and more. Implicit price control may be an intended goal of new reform. However, pharma, feeling price pressure, will point the finger at hospitals, doctors, devices. The MCOs may actually be the favored sector as the ACA has already digested regulation and is increasingly seen as a potential part of the solution.

Carroll continued in a note, "A Hillary Clinton victory would have resulted in a similar path for the ACA. Deficiencies would have been highlighted, solutions suggested, and action to support and strengthen the primary weaknesses of the law would ensue. However, that opinion is now moot. The unexpected Donald Trump victory does not change our opinion that the ACA will see change but does alter its path. Campaign promises to repeal and replace were flying fast and furious, but are now being back-peddled to a certain degree. Early President-Elect Trump commentary has talked about keeping the parts that people favor (guaranteed issue, family coverage to 26) but eliminating the unpopular parts (the mandate, non-compliance penalties). Suggestions such as these demonstrate a lack of understanding that the incoming president has about how healthcare is delivered and financed. Perhaps Trump has become accustomed to having his cake and eating it too."

Stifel continues to have confidence in select stocks, despite the Trump victory:

Stifel continues to believe that the Aetna (NYSE: AET) - Humana (NYSE: HUM) deal will follow through. This argues for owning both stocks as HUM moves toward deal value. Apart from the merger with HUM, investors will begin to align AET shares more closely with UNH providing for multiple expansion from current levels.

Given the merger uncertainty sourcing from both the DoJ and the apparent challenges between leadership teams at both Anthem (NYSE: ANTM) and Cigna (NYSE: CI), there may not be much in the way of stock performance for either of these names near term. That said, should the merger gain new traction, both would be strong, late year performers. Separately, Stifel believes that ANTM is a bargain at 11.7x 2017 earnings, and CI will likely have a very strong, and well received message, should it continue to go it alone as a stand-alone MCO. As such, Stifel continues to have buy ratings on both with favorable views into the next couple years.

Centene (NYSE: CNC) stock continues to feel some pressure following the surprise Trump victory and lingering HNT worries. CNC has good visibility on its recent HNT purchase and should see rising earnings into 2017 as this becomes more visible. Stifel has a Buy rating on CNC shares now but cautions that the stock may be range bound between $65-$75 given HNT integration and further details of TrumpCare. That said, at 11.7x the 2017 consensus estimate, CNC may be the cheapest growth stock in the group.

Maximus (NYSE: MMS) has executed well on opportunities created over the last few years. While the incoming Administration presents some risks to ACA-related work, Stifel fels that additional growth opportunities stemming from TrumpCare will also materialize. As Medicare and Medicaid reform policies emerge, MMS could be entering another period of time where service contract opportunities are prevalent, especially at the state level given Trumps early policy hints facilitating federalism.

Molina (NYSE: MOH) unexpectedly missed earnings on 1Q16 and shares sank, but 2Q16 and 3Q16 provided relief by illustrating improvement. MOH appears to be well positioned for 2017. Moreover, visibility of the pending MCO deals as may support MOH shares. As the AET-HUM deal finds success, MOH will have visibility on the new found Medicare Advantage business acquired as part of the deal. Also, should the ANTM-CI deal be officially rejected, the Medicaid MCOs such as MOH may become immediate takeout candidates again.

UnitedHealth (NYSE: UNH) has a diversified book of business with multiple growth avenues with or without the ACA. The fast-growing and higher-margin Optum subsidiary will become a larger part of the overall company, pushing the multiple higher, in Stifel's view. In addition to a strong investment on its own, UNH has been a “hideout” in recent years. Given the recent election results and uncertainty injected into the market, demand for shares as a safe investment destination will likely persist.

WellCare (NYSE: WCG) is the top performing MCO in Stifel's coverage this year. Earnings that have exceeded expectations, driven by profit margin expansion, have finally discounted into the stock. Stifel believes that the next leg of performance will be driven by continued success with current operations and more top-line growth as both Medicaid and Medicare programs rely on private sector solutions to subdue cost trends. Longer term, WCG should continue to execute, add new markets and products, and potentially sell itself to a larger MCO. All of these were fully illustrated by 3Q16 results and the recently announced acquisition of Universal American.

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