After the release of its fiscal 3Q15 earnings results on October 29, 2015, Aetna (AET) has traded at a PE (price-to-earnings) ratio of 11.3x–13.1x. Currently, Aetna is trading at a lower PE ratio than UnitedHealth Group (UNH) and Cigna (CI). However, it’s trading at a higher PE ratio than Anthem (ANTM).
The private health insurance industry’s key business involves offering medical risk protection in exchange for premiums or predetermined payments. Forward PE multiples are used to assess the value attributed by the market to the health insurance company. A comparative analysis of these valuations helps us determine the best-performing health insurance company in the market.
Aetna’s PE multiples have been supported mainly by better-than-expected growth of its Medicare and Medicaid business. The valuations, however, have been affected negatively due to the company’s high exposure to the Affordable Care Act (or ACA) compliant exchange business.
Because of the pending Humana acquisition, Aetna has suspended its share repurchase program. This is expected to impact EPS (earnings per share) by approximately $0.25–$0.30 in 2016.
Aetna has projected that it will break even in the individual exchange business and earn margins of about 3%–4% in the ACA compliant small group exchange business. The company has planned to introduce new consumer-focused health solutions in four existing markets for individuals and families. These products will offer a combination of simplified benefit structures and improved consumer experience through the deployment of health technology. These efforts are expected to help increase Aetna’s PE multiples.
You can get exposure to Aetna through the iShares S&P 500 Growth ETF (IVW). Aetna accounts for 0.42% of IVW’s total holdings.