How profitable are HMOs such as WLP, HUM, UNH, CVH vs the S&P 500?

How profitable are Wellpoint, Humana, Aetna, Unitedhealth Group, and Coventry Healtcare versus companies in the S&P 500?

At Morningstar.com, WLP’s PE is 11.9 versus 14.2 for its industry and 18.1 for the S&P 500. This means HMOs are less attractive investments than the average stock in the S&P 500. WLP’s forward PE is 9, well below 10.5 for the industry and 12.9 for the S&P 500. It’s price to book price is only 1.6 versus 2.5 for its industry and 3.7 for the S&P 500. WLP’s price to cash flow is 9.1 versus 10.6i and 12.3. And its price to sales is 0.6 versus 0.7 and 2.4 for the S&P 500. The market doesn’t think HMOs are so profitable, and it thinks even less of WLP.

WLP and its industry are less profitable than the S&P 500, too. It’s return on assets is only 6.4% versus 6.7% for it industry and 8.6% for the S&P 500. Its return on equity is 14.1%, compared with 22.1% for the health insurance industry and 21.5% for the S&P 500. And it’s net margin is only 5.5%, compared with 4.7% for the industry and 12.6% for the S&P 500. Those HMOs are wildly profitable!

WLP’s financial statistics are here; AET’s are here; CVH’s are here; Humana’s are here; and UNH’s are here.

Note the relatively low PEG (earnings per share/growth rate) ratios for these stocks. Low PEG ratios suggest the stocks are cheap, despite today’s sharp price declines, or they indicate that the market doesn’t think the stocks will do very well over the next five years.

Smart investors buy companies with a return on assets and return on equity of 20% or better, dividends of 2% to 3% and PEG ratios in the 1.3 to 1.8 range. Note that PEG ratios are based on five-year earnings projections, which usually are overly optimistic, especially these days.

I do not have positions in any of these stocks.

And, of course, I’m not a professional stock picker, analyst or financial adviser. I strive for accuracy, but we’re all human and make mistakes. I take no responsibility for how others trade. Investigate before you speculate.
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