Going forward, companies seeking growth through acquisitions are likely to focus on smaller targets regardless of how the proposed mega mergers pan out.
The health care services industry is poised to evolve further under the ACA. The resulting impact of business opportunities and challenges on earnings and earnings growth should be key drivers of stock prices over the long-term.
Increasing enrollment in Medicare Advantage plans, the privately run version of the government’s Medicare insurance program should result in additional opportunities for health insurers as well as care providers.
The increasing role of data, technology, and preventive care in providing health insurance should open opportunities for health care information services companies like Cerner (CERN).
As for challenges, insurance exchanges render comparison-shopping easier. As such, health insurers may have to cope with a more competitive environment. The ACA also imposes restrictions on underwriting exclusions and pushes insurers to manage medical costs through cost control mechanisms.
As seen from the table below, analysts currently expect health care services companies to grow EPS by 13.2% in 2016 after increasing it 12.6% in 2015.
Earnings, Earnings Growth and Valuation Characteristics of
Selected Large Health Care Services Companies
Source: AlphaProfit analysis of FactSet and Capital IQ data
From a valuation perspective, health care services shares now trade at a forward P/E ratio of 16.9. While not a bargain, health care services company shares compare favorably with the healthcare sector and the broad market in earnings growth. They trade at a PEG ratio of 1.3 compared to 1.4 for the healthcare sector and 1.5 for the broad market. As such, it makes sense to overweight health care services companies in portfolios.
Health Care Services ETFs
Investors looking for ETFs to overweight portfolios in health care services can consider iShares U.S. Healthcare Providers and SPDR S&P Health Care Services.
More from Sam Subramanian can be found at AlphaProfit.