1、COREU.S. Health Care Managed CareValuations in Context of 20 Election2020PresidentialElection:Investorsarenowincreasinglyfocusedonsustainabilityof currentMCOP/Evaluationsduringthe2020presidentialelectioncycle,especiallyINDUSTRY UPDATEU.S.HealthCareServicesNEUTRALUnchangedEquityResearch29 January2019

2、under the potential scenario of a shift of White House power to a Democratic administration.Assuch,wetakea30-yrhistoricallookatMCOvaluationstobetter understandinvestorsentimentduringchangingadministrations.Surprisingly,politicalForafulllistofourratings,pricetargetand earningschangesinthisreport,plea

3、sesee tableonpage2.partyspreadsarenotaswideasexpected(seeFigures1-3).Overall,inboundquerieson thistopicaresofrequentthatwebelievenowistheappropriatetimetoshiftourMCO valuationsfrom2019toa2020basis.Wenowprojecta15.5xaverageMCOP/Eonour 2020EPSestimates(downfrom17.3xon2019),whichfactorsinseveralkeyvari

4、ables.HistoricalMCO Valuations:First,ouranalysisreinforcesthenotionthatMCOsdotrade atmodestpremiumsduringRepublicanvs.Democraticadministrations.Duringour30- yearlook-backperiodstartingwithGeorgeH.Bushselectionin1988,MCOshave generallytradedata14.7xforwardP/E(7%discounttoS&P)duringRepublican administ

5、rations,anda13.8xforwardP/E(16%discounttoS&P)duringDemocratic administrations,leadingtoasimpleblendedaverageof14.3x.However,MCOearnings volatilityhasbeensodramaticallyreducedtodayvs.15-30yrsago,webelievemultiples shouldbehigheroverthenextfewyearsvs.historyundereithermajoradministration.Oter majr csi

6、derais:AswedildeprntoMCOauansfrdvsfds. Medicarevs.Medicaidoperators,wehighlightthatDemocratsaregenerallyviewedas netpositiveforMedicaidMCOs.Conversely,mostinvestorconcernshavefocusedon Medicare.WhileDemocratshistoricallymaynotbeaspositiveasRepublicans(because ofpotentiallylowerMAreimbursementrates),

7、webelievethereisimprovedbipartisan supporttodayforMedicareAdvantage(MA)vs.history.However,thisispartiallyoffset bythenotionofMedicare-for-All.WeexpectsomeDemocraticPresidentialhopefulsto rallyaroundthispopularsloganthroughouttheprimaries.Assuch,theinherent uncertaintyaroundthispublicconversationhast

8、hepotentialtodriveMCOsentiment lower.Whilewecertainlyacknowledgethisheadlinerisk,wealsobelieveanyMCO weaknesswouldprovideexcellentbuyingopportunitiesasitispurelyconceptualtoday, withnotangibleimplementationplan(financingconcernswouldlargelyremainandit wouldbedifficulttopassmajorhealthcarelegislation

9、withoutaSenatesupermajority).OurConclusion:Theneteffectofouranalysisisthatweare:1)raisingourpricetargets modestlyforANTM,UNH,WCG,andMOHdespitethefactthatweareloweringour P/Eassumptionsfor3ofthe4companies;2)trimmingourpricetargetmodestlyfor CNC(tobetterreflecttheACAlawsuitoverhangrelativetothebroader

10、group);and3) leavingourpricetargetsunchangedforCIandHUM(despitelowerprojectedP/E multiples for each on 2020 estimates). Importantly, even with the reduced P/E multiples,westillsee10-15%averageupsidepotentialforthesixOW-ratedMCO stocksinourcoverageuniverse.Assuch,weremainpositiveontheMCOstockgroup ov

11、erallleadinguptoandduringthenextelectioncyclein2020.U.S.HealthCareServices SteveValiquette+12125265496 HYPERLINK mailto:steve.valiquette steve.valiquette BCI, USAndrew Mok, CFA+1 212 526 2687 HYPERLINK mailto:Andrew.Mok Andrew.Mok BCI, USJonathan Yong+1 212 526 3647 HYPERLINK mailto:jonathan.yong jo

12、nathan.yong BCI, USMorgan McCarthy+1 212 526 1168 HYPERLINK mailto:morgan.mccarthy morgan.mccarthy BCI, USCapitalInc.oneofdoesandseekstodoinitsresearchAsabeawarethatthe mayhaveaofthattheofconsiderthisasonlyafactorinmakingtheirPLEASE SEE ANALYST CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON

13、 PAGE 16.CompanyRatingPricePriceTargetEPSFY1(E)EPS FY2(E)OldNew28-Jan-19OldNew%ChgOldNew%ChgOldNewCompanyRatingPricePriceTargetEPSFY1(E)EPS FY2(E)OldNew28-Jan-19OldNew%ChgOldNew%ChgOldNew%ChgU.S. Health Care ServicesNeuNeu HYPERLINK /BC/composite/GER_COMPANY?ticker=ANTM Anthem (ANTM)OWOW270.01282.00

14、305.00815.6715.67-17.6017.60- HYPERLINK /BC/composite/GER_COMPANY?ticker=CNC Centene (CNC)OWOW128.96145.00142.00-27.087.08-8.528.52- HYPERLINK /BC/composite/GER_COMPANY?ticker=MOH Molina Healthcare (MOH)EWEW136.13129.00130.0018.558.55-9.259.25- HYPERLINK /BC/composite/GER_COMPANY?ticker=UNH UnitedHe

15、alth Group (UNH)OWOW266.77279.00290.00414.7014.70-16.6516.65- HYPERLINK /BC/composite/GER_COMPANY?ticker=WCG WellCare Health Plans (WCG)OWOW273.50297.00300.00111.0011.00-13.4013.40-Source:BarclaysResearch.SharepricesandtargetpricesareshownintheprimarylistingcurrencyandEPSestimatesareshowninthereport

16、ingcurrency. FY1(E):CurrentfiscalyearestimatesbyBarclaysResearch.FY2(E):NextfiscalyearestimatesbyBarclaysResearch.StockRating:OW:Overweight;EW:EqualWeight;UW:Underweight;RS:RatingSuspended IndustryView:Pos:Positive;Neu:Neutral;Neg:NegativeU.S. Health Care ServicesValuation Methodology and RisksU.S.

17、Health Care ServicesAnthem (ANTM)Anthem (ANTM)ValuationMethodology:Ourpricetarget isbasedonaP/Eof15xour2020EPSestimateasthecompanysetsthestageforacceleratedEPS growthonce$4blnofPBMsavingsareunlockedfollowingtheconclusionoftheExpressScriptsvendorcontract.RiskswhichMayImpedetheAchievementoftheBarclays

18、ResearchValuationandPriceTarget:Riskstoourpricetargetincludeincreased costtrend,commercialpricingrisk,acceleratedmembershipattritioninthecommercialriskmarket,andlessthanexpectedsavingsfromthe new PBMbusiness.Centene(CNC)Valuation Methodology: Our price target is based on 14.5x our 2020 EPS, which re

19、presents a discount to the government MCO average.RiskswhichMayImpedetheAchievementoftheBarclaysResearchValuationandPriceTarget:Riskstoourpricetargetincludecontract lossesinkeystates,inabilitytomaintainmarginsontheExchanges,andintegrationriskassociatedwiththeFidelisdeal.Cigna(CI)ValuationMethodology

20、:OurpricetargetforCignaisbasedonaP/Eof12xour2020EPSwhichincludestherecentlyacquiredExpressScriptsRiskswhichMayImpedetheAchievementoftheBarclaysResearchValuationandPriceTarget:Riskstoourpricetargetincludeanincreasein costtrend,commercialpricingpressure,and andmembershipattrition.Humana(HUM)ValuationM

21、ethodology:OurpricetargetforHUMisbasedona18xP/Eonour2020EPSestimate,whichassumesHUMcanmakeprogress towardsits4.5-5.0%pretaxtargetmargininIndividualMedicareAdvantage.RiskswhichMayImpedetheAchievementoftheBarclaysResearchValuationandPriceTarget:Downsiderisksincludebelowmarket MedicareAdvantagegrowth,a

22、ninabilitytoimproveMedicareAdvantagemargins,andaninabilitytogrowthehealthcareservicessegment.Molina Healthcare(MOH)ValuationMethodology:Ourpricetargetisbasedon14xour2020EPS.Ourtargetmultiplereflectsthepotentialrisktoearningsfrommarginor membercompressionontheexchanges.RiskswhichMayImpedetheAchieveme

23、ntoftheBarclaysResearchValuationandPriceTarget:RiskstoourpricetargetincludeRFPlossesin keystates(i.e.Texas)andincreasedcompetitionontheexchanges,whichmaypressuremembershipandmargins.UnitedHealth Group(UNH)ValuationMethodology:OurpricetargetisbasedonaP/Eof17xonour2020EPSestimate.WebelieveUNHdeservesa

24、premiumtoother MCOsundercoverageduetoitsfaster-growingOptumfranchiseandstrongMedicaregrowth.RiskswhichMayImpedetheAchievementoftheBarclaysResearchValuationandPriceTarget:Riskstoourpricetargetincludebelowmarket Medicaregrowth,higherthanexpectedcosttrend,andearningsdecelerationatOptum.WellCareHealthPl

25、ans(WCG)ValuationMethodology:Ourpricetargetisbasedon18xour2020EPS.Ourtargetmultipleisapremiumtothepeergrouptoreflectboththe strongoperationsofthecompanyandtherunwayforcontinuedgrowth,whichincludesbothnewMedicaidopportunitiesandaccretiveM&A.RiskswhichMayImpedetheAchievementoftheBarclaysResearchValuat

26、ionandPriceTarget:Riskstoourpricetargetincludetheinability towinupcomingMedicaidRFPs,slowerthanexpectedMedicareAdvantagegrowth,andlowerthanexpectedaccretionfromtheMeridian acquisition.Source: Barclays Research.MCOValuationAnalysis ThroughoutVariousPolitical CyclesComparing 2020 Election Cycle to 200

27、8: Other Exogenous FactorsMCOvaluationsreachedalowpointinNovember2008,shortlyafterPresidentObamawas electedpresident.Thatobservationhascausedsomeconcernamonginvestors,whosee thepotentialforasimilarshiftinpowerinthe2020presidentialelection.Whiletheset-up maybesomewhatsimilar,wenotetheimpactoftheGloba

28、lFinancialCrisis(GFC)during 2008makethiscomparisonmoredifficult.Recall,theS&P500declinednearly25%inthe twomonthsleadinguptothe2008election.ThenegativeimpactoftheGFCwasfelt broadlythroughoutthefinancialindustryincludinghealthinsurance.Thisislargely because MCOs have significant balance sheet exposure

29、 to financial assets (viastatutory reserveinvestments).CombinedwithdeterioratingearningsandanegativeMedicarerate outlook,P/Emultiplesforthegroupfellaslowas5xfollowingthe2008election.Becauseof thenegativesentimentlargelyduetotheGFCandothernon-politicalfactors,webelieveit islessmeaningfultodrawdirectc

30、omparisonsfrom2008tothe2020electioncycle.Our Analysis Reinforces Premium P/E Valuations under Republican Control Duringourthirty-yearlook-backperiodstartingwithGeorgeH.Bushselectionin1988, MCOsgenerallytradedata14.7xforwardP/E(7%discounttoS&P)duringRepublican administrations and a 13.8x forward P/E

31、(16% discount to S&P) during Democratic administrationsleadingtoasimpleblendedaverageof14.3x.WhileMCOsgenerallytradeatamodestpremiumduringRepublicanadministrationsvs.Democraticadministrations, wenotetheoverallspreadisnotaswideaswewouldhaveexpectedittobe.Assuch,we nowdrilldeeperandtakeacloserlookatMe

32、dicareandMedicaidvaluationssince2008to helptobetterframecurrentandforwardP/EvaluationsforvariousMCOsubcategories.FIGURE 1MCO Valuations Under Various PresidentsAbsolute P/EPartyAll MCOsDiversifiedMedicareMedicaidSPXGH BushRepublican11.7x11.7xNANA12.5xClintonDemocrat15.1x14.8x16.2xNA18.5xGW BushRepub

33、lican14.5x14.6x13.1x14.7x17.2xObamaDemocrat12.5x10.6x12.2x15.0 x14.4xTrumpRepublican17.8x15.9x19.5x19.8x17.6xRepublicanSimpleRepublican14.7x14.1x16.3x17.2x15.8xDemocrat Simple AvgDemocrat13.8x12.7x14.2x15.0 x16.5xBlended Simple AvgBlend14.3x13.5x15.3x16.5x16.1xRelative P/EPartyAll MCOsDiversifiedMed

34、icareMedicaidSPXGH BushRepublican94%94%NANA100%ClintonDemocrat81%80%87%NA100%GW BushRepublican85%85%76%85%100%ObamaDemocrat87%74%85%104%100%TrumpRepublican101%90%111%112%100%RepublicanSimpleRepublican93%89%103%109%100%Democrat Simple AvgDemocrat84%77%86%91%100%Blended Simple AvgBlend89%84%95%103%100

35、%DrsfdCO:AT(acurdyCSnDc),N,C,andNHdcareCs:CH(acurdyATnay),HS(acurdyCInAprlf1)andHdcadCO:GP(curdyANMnDecmr),C,OH,adCGSource: Refninitiv, Barclays ResearchFIGURE 2Diversified MCO Forward P/E Valuations (AET, ANTM, CI, UNH)35.0 x30.0 xGHBushClintonGWBushObamaTrump25.0 x20.0 x15.0 x10.0 x5.0 xNov-88Nov-

36、90Nov-92Nov-94Nov-96Nov-98Nov-00Nov-02Nov-04Nov-06Nov-08Nov-10Nov-12Nov-14Nov-16Nov-180.0 xNov-88Nov-90Nov-92Nov-94Nov-96Nov-98Nov-00Nov-02Nov-04Nov-06Nov-08Nov-10Nov-12Nov-14Nov-16Nov-18DemocratRepublican AverageDiversified MCO Relative P/E Valuations160%140%GHBushClintonGWBushObamaTrump120%100%80%

37、40%20%Nov-88Nov-90Nov-92Nov-94Nov-96Nov-98Nov-00Nov-02Nov-04Nov-06Nov-08Nov-10Nov-12Nov-14Nov-16Nov-180%Nov-88Nov-90Nov-92Nov-94Nov-96Nov-98Nov-00Nov-02Nov-04Nov-06Nov-08Nov-10Nov-12Nov-14Nov-16Nov-18DemocratRepublican AverageSource: Refinitiv, Barclays ResearchGovernment MCO Valuations: 2008-Presen

38、tIn2008,MedicaidstocksbegantorallyontheprospectsofDemocraticcandidateand outspokenadvocateforhealthcarereformBarackObamasecuringtheWhiteHouse. OnceObamawaselected,itbecameincreasinglyclearthatthenewadministrationwould looktoprivateMedicareasasourceoffundingforproposedreform.Thiswasvalidatedin Februa

39、ry2009whenObamareleasedhispreliminaryFY2010budgetindicating$177bnof savingsfromMedicareoverthenexttenyearsandfollowedupbyCMSsreleaseofaninitial 5%ratecutforthe2010planyear.Together,thissentMedicarestockstumbling.The discountedvaluationsforMedicarestockscontinuedthroughboththepassageoftheACA in2010an

40、dtheimplementationofreformin2014,whichoverwhelminglybenefitted Medicaid.However,inJune2015,AETannounceditsacquisitionofHUMatthesametimewhen Medicaid expansion enrollment started to fade. From this point on, we believe the environmentforMedicarebecamemorefavorablethanforMedicaid,aviewthatwestill hold

41、today.Thisissupportedbyattractiveseniorgrowth(3%+annually)fueledbytheaging BabyBoomersoverthenext10years.CombinedwithexpectedMApenetrationgains,this marketisexpectedtogrowmembershipby7%annuallybeforeconsideringpotential geographicexpansion.WhenRepublicanssweptthepresidencyandbothchambersofCongressin

42、2016,the outlookforMedicarebecameincreasinglypositive,whiletheoutlookforMedicaidwas somewhattempered.InadditiontothepositiveoutlookforMedicarereimbursement, Republicansalsoproposedcorporatetaxreformand2019HIFrepeal,whichtogether disproportionately benefit Medicare. Under this new Medicare-friendly a

43、dministration, MedicarestocksrepresentedsolelybyHUMatthispointarenowtradingatamodest premiumtoMedicaidstocks.EvenwithapotentialDemocraticadministrationin2020,theconsistentandreliabledouble- digitpercenttop-linegrowthinMedicaremakethisthemostattractiveendmarketin managedcare.Whilethereiscertainlyasiz

44、ablerunwayleftinMedicaidspendingtobe capturedbyMCOs,wenotethat;1)notallMCOswillshareintheopportunityequally,and2)MedicaidmembershipcharacterizedbytheRFPprocessisinherentlymorevolatile anduncertainthanMedicaremembership.Thus,withoutunderlyingsupportforMedicaid expansioninFL,GA,NC,andTX,webelieveMedic

45、arebusinessesshouldcontinuetotrade atapremiumtoMedicaidbusinesses,whichisreflectedinourtargetmultiplesbelow.Investors Should Have Greater Comfort Today With Medicare MCOsBecauseDemocratsaregenerallyviewedasnetpositiveforMedicaidMCOs,mostinvestor concernshavefocusedonMedicare.WhileDemocratshistorical

46、lymaynotbeaspositive asRepublicans(becauseofpotentiallylowerMAreimbursementrates),thereisimproved bipartisansupporttodayforMedicareAdvantage(MA)vs.history.ThroughouttheObama administration,IndividualMAmembershipgrewatanaveragerateof7.0%annually, despite steep reimbursement cuts due to the ACA. From

47、here, we believe Medicare reimbursementshouldkeeppacewithcosttrendsevenwithaDemocraticadministration, and underlying senior demographics should continue to support 6-7% industry membershipgrowth.FIGURE 3Medicare MCO Forward P/E Valuations (CVH, HS, HUM)GHGHBushClintonGWBushObamaTrump25.0 x20.0 x15.0

48、 x10.0 x5.0 xNov-88Nov-90Nov-92Nov-94Nov-96Nov-98Nov-00Nov-02Nov-04Nov-06Nov-08Nov-10Nov-12Nov-14Nov-16Nov-180.0 xNov-88Nov-90Nov-92Nov-94Nov-96Nov-98Nov-00Nov-02Nov-04Nov-06Nov-08Nov-10Nov-12Nov-14Nov-16Nov-18DemocratRepublican AverageMedicare MCO Relative P/E Valuations200%GHBushClintonGWBushObama

49、TrumpNov-88Nov-90Nov-92Nov-94Nov-96Nov-98Nov-00Nov-02Nov-04Nov-06Nov-08Nov-10Nov-12Nov-14Nov-16Nov-18DemocratRepublican AverageNov-88Nov-90Nov-92Nov-94Nov-96Nov-98Nov-00Nov-02Nov-04Nov-06Nov-08Nov-10Nov-12Nov-14Nov-16Nov-18FIGURE 4Medicaid MCO Forward P/E Valuations (AGP, CNC, MOH, WCG)35.0 x30.0 xG

50、HBushClintonGWBushObamaTrump25.0 x20.0 x15.0 x10.0 x5.0 xNov-88Nov-90Nov-92Nov-94Nov-96Nov-98Nov-00Nov-02Nov-04Nov-06Nov-08Nov-10Nov-12Nov-14Nov-16Nov-180.0 xNov-88Nov-90Nov-92Nov-94Nov-96Nov-98Nov-00Nov-02Nov-04Nov-06Nov-08Nov-10Nov-12Nov-14Nov-16Nov-18DemocratRepublican AverageMedicaid MCO Relativ

51、e P/E Valuations180%GHBushClintonGWBushObamaTrumpNov-88Nov-90Nov-92Nov-94Nov-96Nov-98Nov-00Nov-02Nov-04Nov-06Nov-08Nov-10Nov-12Nov-14Nov-16Nov-18DemocratRepublican AverageNov-88Nov-90Nov-92Nov-94Nov-96Nov-98Nov-00Nov-02Nov-04Nov-06Nov-08Nov-10Nov-12Nov-14Nov-16Nov-18Conclusion: With lower P/Es on Sh

52、ift to 2020, We Still See 10-15% Upside UponconsiderationofallofthehistoricalanalysisandothercurrentMCOindustryvariables discussedinthisreport,wenowshiftourvaluationbasisfortheMCOstockgroupfrom 2019to2020EPSestimates.AsshowninOurConclusion:Theneteffectofouranalysisisthatweare:1)raisingourpricetarget

53、smodestlyforANTM,UNH,WCG,andMOHdespite thefactthatweareloweringourP/Eassumptionsfor3ofthe4companies;2)trimming ourpricetargetmodestlyforCNC(tobetterreflecttheACAlawsuitoverhangrelativetothe broadergroup);and3)leavingourpricetargetsunchangedforCIandHUM(despitelower projectedP/Emultiplesforeachon2020e

54、stimates).Importantly,evenwiththereduced P/Emultiples,westillsee10-15%averageupsidepotentialforthesixOW-ratedMCO stocksinourcoverageuniverse.Assuch,weremainpositiveontheMCOstockgroup overallleadinguptoandduringthenextelectioncyclein2020.Figure5,ournewaverageprojectedP/Eis15.5xonour2020estimates,whic

55、hisdown fromourprior17.3xaverageprojectedP/Eonour2019estimates.Webelievethisis prudentasthemarketpricesinsomeriskoflessRepublicanandmoreDemocraticcontrol, aswellassomeincrementalmodestdiscountfortheexpectedattentionofthenotionof Medicare-for-All by some Democratic Presidential hopefuls (even though

56、it remains conceptual),butcollectivelyoffsetbyourviewthattheoverallMCOgroupstilldeserves premiumvaluationstodayvs.15-30yearsagoundereitheradministrationduetothe dramaticallyreducedearningsvolatilityduetogreaterdiversification,aswellasmore sophisticatedtoolstomoreaccuratelypredictandcontrolmedicalcos

57、ts.OurConclusion:Theneteffectofouranalysisisthatweare:1)raisingourpricetargets modestlyforANTM,UNH,WCG,andMOHdespitethefactthatweareloweringourP/E assumptionsfor3ofthe4companies;2)trimmingourpricetargetmodestlyforCNC(to betterreflecttheACAlawsuitoverhangrelativetothebroadergroup);and3)leavingour pri

58、cetargetsunchangedforCIandHUM(despitelowerprojectedP/Emultiplesforeachon 2020estimates).Importantly,evenwiththereducedP/Emultiples,westillsee10-15% averageupsidepotentialforthesixOW-ratedMCOstocksinourcoverageuniverse.As such,weremainpositiveontheMCOstockgroupoverallleadinguptoandduringthenext elect

59、ioncyclein2020.FIGURE 5MCO Industry: New Barclays Price Targets As We Shift P/E Multiples to 2020 EPS Basis2019 EPS2019Target P/EOld PriceTarget2020 EPS2020Target P/ENew PriceTargetCurrent PriceUpside toPrice TargetANTM$17.6016.0 x$282.00$20.3015.0 x$305.00$270.0113%CI$16.6013.0 x$220.00$18.8012.0 x

60、$220.00$195.0813%UNH$14.7019.0 x$279.00$16.6517.0 x$290.00$266.779%HUM$17.5520.0 x$351.00$19.2518.0 x$351.00$301.6316%CNC$8.5217.0 x$145.00$9.7514.5x$142.00$128.9610%MOH$9.2514.0 x$129.00$9.4014.0 x$130.00$136.13-5%WCG$13.4022.0 x$297.00$16.2518.0 x$300.00$273.5010%Average17.3x15.5xSource: Barclays