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September 18, 2012

Analyst bullish on Aetna, Cigna, UnitedHealth

Health insurers face pricing and use challenges as they head into fall, but some managed care organizations, among them Aetna, Cigna and UnitedHealth, will still be able to deliver solid earnings growth, according to a Jefferies analyst, The Associated Press reports.

Analyst David Windley said in a Tuesday morning research note that health care use is no longer slowing like it has been, a trend that has helped insurer performance in past quarters. He also noted that insurers also have to deal with competition over the price of their coverage.

But Windley said large, diversified companies with strong track records will continue to do well, and he recommends owning Aetna Inc., UnitedHealth Group Inc. and Cigna Corp., three of the five largest U.S. health insurers. The trio has headquarters or major operations in the Hartford area.

Windley noted that managed care share prices have underperformed compared to the Standard & Poor's 500 index since the start of second-quarter earnings, and the shares of "solid operators" have been dragged down along with stocks that have disappointed investors. He said this makes valuations attractive for higher-quality managed care companies, and he noted that Aetna's valuation is cheapest in the group.

On the flip side, Windley downgraded his rating on shares of Woodland Hills, Calif.-based Health Net Inc. and Long Beach, Calif.-based Molina Healthcare Inc. to "underperform" from "hold."

"Both of these companies have a number of hurdles to overcome, carry significant operational/execution risk, and are much more likely than peers to miss numbers and lower guidance," Windley wrote.

He said the price of Health Net shares has climbed since it reported disappointing second-quarter results in August, but "the rebound is not justified."

"Management hasn't instilled confidence that it can execute," the analyst wrote.

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