Some Healthy Insurance Stocks

 | May 07, 2013 | 10:00 AM EDT
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In late March I wrote an article on the improving health of insurance stocks. I argued that these stocks were one of the cheaper sectors in the overall market. Some were selling under book value. In addition, many were increasing dividends and stock buybacks.

The optimism now seems warranted as the majority of the industry has reported earnings and revenues in the first quarter that were over expectations. These stocks have had good runs as a result. In the previous article, we took a look at property/casualty insurers. Both stocks that I profiled, Prudential (PRU) and Allstate (ALL), are up since that article with Prudential rising by more than 10 percent.

I want to take a look today at a few of the health insurers that look undervalued at current levels. Like the property/casualty sector, they have posted strong results in the first quarter. They are also still fairly cheap and are gathering upgrades from analysts and/or increasing guidance. Here are a few I like here.

Aetna (AET) -- The company recently posted earnings per share of $1.50 which was 12 cents above the consensus. It also said memberships grew for the fourth straight quarter as its Medicare business was strong. It raised earnings guidance to $5.50 to $5.60 a share for FY2013. The stock is selling for less than 11x this year's expected earnings and analysts project revenues will grow 8% to 9% annually over the next couple of years. The stock sports a five-year projected price/earnings-to- growth ratio of under 1 (.96) and has a dividend yield of 1.4% -- which I expect will move up over the next few years.

Humana (HUM) -- The company posted earnings last week that easily beat the top and bottom line consensus expectations. Humana said it now sees FY13 EPS of $8.40-8.60 versus previous guidance of $7.60-7.80 and against consensus estimates of just under $8 a share. On the back of the earnings beat, JPMorgan upgraded the shares to "Overweight" from "Neutral". It also raised its price target on the HUM to $91 from $88 a share. At $75 a share, the equity changes hands at approximately 8.5x their expected earnings. The stock yields 1.5% with under a 15% payout ratio. Analysts expects between 5% to 7% sales increases annually over the next two fiscal years and HUM has a five-year projected price/earnings-to- growth ratio of under 1 (.92).

Cigna (CI) -- Another health insurer that easily beat on the top and the bottom line when it reported last week. It was the fourth straight quarter Cigna delivered results that came in over earnings expectations and the company also raised full year guidance to $6 to $6.40 for FY2013. Cigna is showing strong revenue gains aided by its recent acquisition of HealthSpring (HS) and better-than-expected cost management.  Analysts expect stronger sales growth at Cigna than the other two insurers profiled and CI has a five-year projected price/earnings-to- growth ratio near 1 (1.03). The stock sells for less than 10x 2014's expected earnings.

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