NEW YORK (CNN/Money) -
I don't ordinarily like health insurance stocks. Health-care may be one of America's growth sectors, but insurers seem to be on the wrong end of the business.
They invariably get squeezed because the premiums they charge can't be raised fast enough to recoup costs that are rising at a double-digit rate.
When it comes to health-care investing, I'd rather own shares of pharmaceutical companies. Their technology provides greater value added and the political pressures to limit price increases aren't quite as great.
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Nonetheless, we may now be at one of those rare moments when health insurance companies are fundamentally attractive.
The industry is consolidating. The upturn in the economy is boosting enrollment. Cost pressures are easing a bit.
As a result, leaders in the industry, such as Aetna and UnitedHealth Group, can expect strong earnings gains in 2004. Moreover, their stocks are cheap.
Aetna, with enrollment down from 17.5 million people to around 13 million recently, expects to gain at least 400,000 new members next year.
UnitedHealth, with more than 18 million members, hopes to add 1 million.
Growth in costs both for HMOs and for retail prescription drugs are expected to slow by about 5 percent next year. The increases will still be several times the rate of consumer inflation, but this slight easing will take pressure off industry profit margins.
Recent Medicare legislation will also give the health-insurance industry a break, at least insofar as seniors are concerned.
The expected result: strong earnings growth in 2004.
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Aetna's profits are projected to rise 18 percent in 2004 and continue at a 15 percent compound annual rate over the next five years, while UnitedHealth could gain 23 percent next year and continue at a 17 percent rate.
Despite these well-above-average prospects, both stocks look cheap.
Aetna (AET: Research, Estimates), at a recent $64 a share, trades at less than 11 times estimated 2004 earnings.
The faster growing UnitedHealth (UNH: Research, Estimates), at $55 a share, trades at a P/E just over 15.
Both companies plan to use their free cash flow for substantial stock buybacks, which should bolster their historically cheap share prices.
Michael Sivy is an editor-at-large for Money magazine. Sign up for free e-mail delivery of Sivy on Stocks every Tuesday and Thursday.
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