Share tips: tuck into a slice of America's Medicaid pie

With Barack Obama favourite to be re-elected as American president in November, it’s likely his flagship healthcare reform bill will be implemented. This should prove a boon for health insurers such as this one, says Paul Hill.

By Paul Hill

published 28 August 2012

in Features

According to William Hill, Barack Obama is the 2/5 red-hot favourite to be re-elected at the American presidential elections in November. So it's likely his flagship healthcare reform bill will be implemented, forcing up to 35 million more Americans to get medical insurance by 2014. Of these, 18 million are from low-income families and will automatically be enrolled for free under Obama's Medicaid programme. The rest will be privately funded by companies or individuals. This should prove a boon for health insurers such as Wellpoint.

Wellpoint is America's second-biggest player in this sector it has a turnover of $60bn and covers 33.5 million citizens across 14 states. Its scale and trusted Blue Cross/Blue Shield brands give it huge cost advantages over smaller competitors, especially when negotiating deals with large hospital chains.

Wellpoint announced in July that it aims to buy Medicaid benefit provider Amerigroup for $4.9bn, which could add an extra $1 to earnings per share (EPS) by 2015. The deal will enable it to claim a bigger slice of the Medicaid pie. The move is a good one, given the growing number of states seeking to contract out healthcare to cut costs. American states currently spend $80bn outsourcing Medicaid provision, but this could surge to $300bn in the next five years.

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Better still, the stock is cheap. Wall Street predicts earnings per share (EPS) of $7.35 and $8.57 for this year and next, putting the stock on a price/earnings ratio (p/e) of eight. It doesn't have large capital commitments, generates solid cash flows and delivers a 10% return on equity. I'd rate it on a multiple of one times net assets, or at about $71 per share.

Wellpoint (S&P WLP) rated a BUY by Deutsche Bank

Be aware that it's exposed to lower investment returns and higher medical claims, and British investors need to factor in foreign-currency fluctuations. But I'm not put off.

The firm is well positioned to benefit from Obamacare and, paradoxically, could even be a winner in the unlikely event that Republican candidate Mitt Romney makes it into the White House. He has vowed to repeal the bill, thereby removing a chunk of the industry's growth potential, but he has also promised to eliminate a large number of its costliest regulations. Deutsche Bank has a target price of $72.

Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments. See www.moneyweek.com/PGI, or phone 020-7633 3634 for more.

Paul gained a degree in electrical engineering and went on to qualify as a chartered management accountant. He has extensive corporate finance and investment experience and is a member of the Securities Institute.

Over the past 16 years Paul has held top-level financial management and M&A roles for blue-chip companies such as O2, GKN and Unilever. He is now director of his own capital investment and consultancy firm, PMH Capital Limited.

Paul is an expert at analysing companies in new, fast-growing markets, and is an extremely shrewd stock-picker.