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A Pair Trade In U.S. Healthcare: Bullish on Centene, Neutral On Aetna

U.S. Healthcare Pair Trade: Bullish On Centene, Neutral On Aetna

On Monday, Bernstein upgraded Centene Corp CNC 3.22% as it downgraded shares of Aetna Inc AET 2.35%. The paired actions come on heels of the U.S. presidential elections, with the firm suggesting that repealing and replacing the Affordable Care Act ("Obamacare") is likely to be Trump's primary focus.

Analyst Lance Wikes is of the view that the Trump administration is likely to be guided by four principles in its approach toward the healthcare sector:

    1. Repealing of Obamacare, seen as a political necessity, with premium decreases as the objective of the administration. The firm believes uninsured will increase but not to pre-ACA levels.
    2. Entitlement reform and deficit reduction is unlikely to be its top priority.
    3. Retaining popular consumer protection.
    4. America First, when translated to drug supply chain, will put cost pressure on drugs.

Enrollment And Margin To Suffer

The firm sees big impacts to enrollment and margin for Medicaid expansion membership. However, this is only 9 percent of Centene's business and 1–2 percent of large managed care organization businesses, the firm noted. The firm also believes that HCA Holdings Inc HCA 1.52% can see some upside in its big markets of Texas and Florida, which did not see expansion in Medicaid.

Hospital Bad Debts Northward Bound

Bernstein expects hospital bad debts to increase from reductions in insured enrollment through public exchange and Medicaid expansion changes. That said, the firm sees moderated impacts as its two largest markets are in non-expansion states.

The firm believes ACA Health Insurer Taxes will be repealed, although it feels that other parts of the repeal and replace package would need cost savings. For now, the firm said it is not making changes to its model, as it awaits further clarity on administrative policy proposals.

That said, the firm lowered its price target for shares of Centene to $69 from $77 to reflect the declines in enrollment and the resultant increase in bad debts, but raised its rating to Outperform from Market Perform, citing valuation.

The firm, however, lowered its ratings on Aetna to Market Perform from Outperform, while maintaining the price target on the shares at $132.

Summary Of Ratings Within The Space

  • Aetna: Downgraded to Market Perform from Outperform; $132 price target.
  • Centene: Upgraded to Outperform from Market Perform; price target trimmed to $69 from $77.
  • HCA Holdings: Market Perform; price target lowered to $85 from $89.

At Last Check ...

  • Aetna was up 3.65 percent at $123.63.
  • Anthem shares were up 3.1 percent at $137.82.
  • Centene was up 2.19 percent at $51.79.
  • Express Scripts was up 2.59 percent at $76.52.
  • HCA shares were up 3.33 percent at $71.90.
  • UnitedHealth Group was up 3.63 percent at $151.72.
DateFirmActionFromTo
Nov 2016Credit SuisseUpgradesNeutralOutperform
Sep 2016Evercore ISI GroupInitiates Coverage onBuy
Jul 2016Wolfe ResearchDowngradesOutperformPeer Perform

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