Since the election of Donald Trump, the health maintenance organization (HMO) sector has been jittery. The President-elect has vowed to repeal and replace the HealthCare Reform Act, brought in by Obama. This means that after adjusting their business strategies to the changes required by the reform effected in Mar 2010, the players will have to re-do their businesses.

The changes coming up may even include doing away with the subsidy provided on exchanges that makes insurance affordable. So there is the fear of the uninsured rate increasing among other substantial changes.

Despite significant uncertainty plaguing the HMO sector, Magellan Health Inc. MGLN is one stock that looks appealing with its strong fundamentals and improving prospects.  

What Makes Magellan Health an Attractive Pick?

Share Price Movement: Magellan Health’s shares have gained around 4.65% year to date compared with 1.43% gain logged by the Zacks categorized Medical-HMO industry. In fact, in the last six months, ending Dec 31, 2016, the company’s stock price increased nearly 14.1% versus 10.4% gain for the broader industry.

Top-line Growth: Magellan Health’s revenue has increased at a CAGR of 13.21% over the last five years (2011–2015). Further, the company expects to write new business effective in 2017 in both its healthcare and pharmacy segments.  Also, the annualization of new business sold during calendar year 2016, same-store growth, improved profitability in its existing Magellan Complete Care (MCC) markets, the annualization of results from the Armed Forces Services Corporation (AFSC) and The Management Group (TMG) acquisitions, and the winning of the $3.5-billion Virginia MLTSS RFP should drive top-line growth. The company’s acquisition of Veridicus in its Pharmacy Management segment will also add to its revenues in 2017.

Estimates Revisions: Over the past 60 days, the Zacks Consensus Estimate for Magellan Health increased 1.9% to $3.15 per share for 2016 and 21.5% to $4.30 per share for 2017. The positive earnings estimate revisions indicate analysts’ confidence and substantiate the Zacks Rank #1 (Strong Buy) of the stock.

Also, Magellan Health beat earnings estimates in three of the past four quarters, with the average positive surprise being 42.6%. The company’s strong consistent operating performance as well as successful execution of its growth strategy should drive the stock’s performance in the upcoming quarters as well.

Earnings per Share Growth: Magellan Health witnessed a decline in earnings in 2015 and 2014 but saw growth in the first nine months of 2016. The company’s EPS guidance range of $4.19 to $4.57 translates into a year-over-year growth rate of 72% at the mid-point. Considering the Zacks Consensus Estimate, EPS is expected to grow 160% in 2016 and 36% in 2017. Also, the Zacks Consensus Estimate reflects 21% EPS growth over the next five years, which is more than the industry’s expected growth of 16.20%.

Attractive Valuation: The stock seems attractive given its cheap valuation. Its P/E ratio of 18.32x is lower than the 20.70x P/E for the industry. Also, its PEG ratio (which takes into consideration the growth rate) of 0.87x is lower than the PEG ratio of 1.28x for the industry.   

Other Stocks Worth a Look

Some other well-placed stocks among health maintenance organizations are UnitedHealth Group Inc. UNH, WellCare Health Plans, Inc. WCG and Humana Inc. HUM. Each of these stocks carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

WellCare Health, a provider of managed care services for government-sponsored health care programs, delivered a positive surprise in each of the last four quarters, with an average beat of 40.01%.

UnitedHealth Group, a diversified health and well-being company, delivered positive surprises in the last four quarters, with an average beat of 3.86%.

Humana Inc. a health services company that facilitates the delivery of health care services through networks of providers to its medical members, delivered positive surprises in three out of the last four quarters, with an average beat of 1.94%.

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Humana Inc. (HUM): Free Stock Analysis Report
 
UnitedHealth Group Incorporated (UNH): Free Stock Analysis Report
 
WellCare Health Plans, Inc. (WCG): Free Stock Analysis Report
 
Magellan Health, Inc. (MGLN): Free Stock Analysis Report
 
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