Senior Analyst Guides Investors In The Health Services Sector: Which Sector Stocks Are Best Positioned To Benefit From Recent U.S. Legislation?
December 14, 2009 - The Wall Street Transcript has just published Consumer Health Services Report offering a timely review of the Health Services sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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GREGORY K. NERSESSIAN, CFA, is Vice President and Senior Analyst in the equity research department at Credit Suisse, covering the managed care industry. Mr. Nersessian joined Credit Suisse in May 2006 after spending five years at Lehman Brothers, where he covered the managed care industry with primary coverage responsibilities for the Medicaid managed care and disease management industries. Mr. Nersessian received his MBA from the Darden School of Business Administration at the University of Virginia in 2001, prior to which he worked as a Research Analyst for Dreyfus and in the Private Client Asset Management division of Chase Manhattan's Private Bank. Mr. Nersessian graduated from Georgetown University in 1994 and has held a CFA charter since 2005.
TWST: What are some companies that you see as particularly strong investments at the moment?
Mr. Nersessian: Well, among the large-cap names, I would point to UnitedHealth (UNH);as the best positioned from a reform standpoint. It is the most diversified company in our coverage universe. It is the number one or number two player in every major market segment - employer-sponsored, Medicare, Medicaid, individual, and a number of important fee-based businesses and specialty offerings. So UnitedHealth will be a leading player in virtually every conceivable reform scenario in our opinion. It has a large national provider network, so it stands to be a prominent player in a number of state-based insurance exchanges and, like I said, the number one player in Medicaid.
The company has struggled in recent years, particularly in their employer-sponsored business in part due to the reasons that we talked about before in terms of the economy. They also had number of service-related issues and their margins stretched a little too far there during the boom years. Those margins started to revert back to a normalized level as cost trends stabilized and the pricing environment became more competitive. But that process, I think, is largely over. And as we head towards 2010, I think you are going to start to see a recovery in their commercial margins and continued strong growth in Medicaid, and a very strong balance sheet. They've won a large government contract with the Department of Defense, and I think they are poised to consolidate the marketplace going forward, once we know what direction reform is going to take us.
TWST: Are there any other companies you see as good investments at the moment?
Mr. Nersessian: The other name I would highlight is a small-cap name, Amerigroup (AGP). The company is focused predominantly on the Medicaid market segment and is the largest of the three standalone Medicaid managed care companies I cover. They serve Medicaid beneficiaries in 11 states. They are the number one player in Texas, they are the number two player in Florida and Georgia. They have a strong presence in New York. So from the standpoint of coverage expansion as a result of health care reform, they are extremely well positioned, and I think they are ultimately going to be viewed as an attractive partner for larger carriers looking to get more exposure in the Medicaid space.
Amerigroup has also been very active in what many believe is the next frontier of managed care expansion, which is delivering care to the elderly and disabled beneficiaries of Medicaid. This is a market segment that is not historically been served by managed care organizations, yet it's a big source of cost pressure for states, and states are increasingly looking for managed care partners that can help control those costs. Amerigroup along with UnitedHealth are the biggest and most experienced in that market segment. And that's a very, very large revenue base.
Of the $400 or so billion dollars a year that's spent on Medicaid, about 70% of that is on the elderly and the disabled - so a very, very large market opportunity and virtually untapped by the publicly traded managed care organizations today. And then finally, they have extremely strong balance sheet. In managed care, we look at how much free cash they hold at the parent company level. They have about $250 million of free cash on an equity market cap of $1.1 billion, so they're extremely well capitalized.
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