TAKING STOCK: Takeover candidates may make good health care investments

Dear Mr. Berko: What do you think of the health insurance industry? Are there any good stocks in this area that you think will move higher during the next year? I'm 59. My 401(k) is down 40 percent from 2007, and I'm trying to be smartly aggressive to make up this loss. If you think the health care insurance industry is green to go, please recommend some issues. I have $29,000 in cash looking for a solid but aggressive investment idea. EM, San Antonio Dear EM: Oscar E. Pfister, a Canadian health care consultant from Guelph who is advising members of Congress on reforming our health care system, has recommended the purchase of several small managed-care companies. Pfister believes that the following issues are smartly positioned as potential takeover candidates by larger providers. While this group has done well and fundamentals look strong, there is a growing uncertainty in the air that's making health care executives a little nervous. They're concerned about the impact of looming health care reform, which may lower the quality of care by redefining expected outcomes. They're also concerned about lower enrollments, which are a result of a soft economy and high unemployment rates. Many insurers are having trouble bolstering membership and maintaining premiums that are under fire due to increased competition, changes in Medicare billing procedures and regulatory pushback. They're also concerned that the government will put pressure on their low margins coupled with the government's need to reduce Medicare spending. But the current demographics suggest that the health insurance industry should experience modest growth in the foreseeable future. These factors have convinced Pifster that we may see a tsunami of merger-and-acquisition activity in which the big guys like Aetna, Cigna, Humana, United and Wellpoint may consider the following small, managed care companies to be attractive takeover candidates. Centene (CNC-$43) is a $5.3 billion revenue-managed care company with 1.5 million members. In the past 5 years, net income has grown nearly 50 percent on a 40 percent growth in revenues. This year, CNC should grow earnings to $2.20 from $1.66 on higher revenues of $7.3 billion. CNC has a $2 billion market cap, and a possible takeover price may be between $53 and $56. WellCare Health Plans (WCG-$52) is a $6.1 billion revenue company with 1.5 million Medicaid members; 811,000 Prescription Drug Plan members; and 132,000 Medicare Advantage members. Earnings have been all over the map in the past six years, and 2012 earnings may come in at $4.21 -- about 25 percent lower than last year's earnings. WCG has a market cap of $2.1 billion, and a takeover price could be about 25 percent higher than the current market price. Molina Healthcare (MOH-$26) has 1.6 million Medicare, Medicaid and other government health care-eligible members. Revenues for 2012 are expected to be $5.5 billion -- up from $4.6 billion in 2011 -- and earnings may come in at $1.75 up from last year's $1.55. MOH has a market cap of $1 billion and could be worth $35 to $39 on a takeover. Health Net (HNT-$34) is an $11.7 billion revenue health care company with more than 6 million members in Medicare, Medicaid, VA, and Tricare programs. Revenues will be lower this year, but better operating margins should push 2012 earnings to $3.32, up from $3.04 last year. A takeover of the $2.4 billion market-cap company could happen at $40 to $44 a share. Finally, Coventry Health Care (CVH-$30), a $12.2 billion insurer with 6.5 million insured on its books, expects revenues of $13.7 billion for 2012, which is up 10 percent from last year. Earnings for this $4.6 billion market-cap company should be up 8 percent to $3.35 for 2012. A takeover may move CVH to $38. Pfister, who is also bullish on Pfizer (PFE-$21), suggests you invest an equal amount of money in all five insurers and recommends Pfizer as a long-term investment. ---------- Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate website at www.creators.com. © 2011 Creators Syndicate Inc. Published: Mon, Jan 23, 2012