Under the Affordable Care Act, also known as Obamacare, most Americans were required to have a qualified health insurance plan in force by January 1, 2014.
The IRS fines for non-compliance in 2015 will be $325, and will jump to $695 in 2016. The fines will be adjusted to inflation after 2016.
And it’s the fear of these Internal Revenue Service fines that have pushed shares of Aetna (AET) higher on Tuesday, as the health insurer saw its membership jump more than expected.
Aetna shares rallied more than 1.2%, or $1.07 per share after the healthcare company announced that it expects to add more Medicare and public-exchange members in the current quarter than previously forecast.
The Hartford, Connecticut-based insurer now sees its overall membership surpassing its previous estimate of 23.4 million members, as it gains many new subscribers from Obamacare.
AET shares closed the day at $90.34 with more than three million shares trading hands. This compares to an average volume of 2.4 million on a typical day.
As you can see from the chart below, Aetna shares have been on a stellar run since Obamacare was signed into law in 2010. Shares of AET have significantly outperformed the S&P 500 (^GSPC), rising more than twice as fast as the broader market index.
Now, along with the better-than-expected membership results, Aetna also reiterated its earnings outlook for the current year with its announcement.
The company said it expects to earn $6.90 per share in 2015, which is on the conservative side of Capital IQ’s expectation for full-year earnings of $7.14.
The company expects revenue of at least $62 billion for the year.
So, the question for investors is, can this stock go higher, given that it sits near its 52-week high?
Boasting Solid Financials…
Despite the stock’s impressive run-up, there’s still plenty of room for Aetna to climb higher.
The company’s Q3 2014 results illustrate the strength of the Aetna brand.
In its recent filing, total revenue for the quarter grew to $14.7 billion, an increase of 13% over the Q3 2013 revenue of $13.0 billion.
And this growth in revenue is making its way to the bottom line, as well.
Aetna reported an increase in earnings per share (EPS) of 21%, growing from $1.38 in Q3 2013 to $1.67 in Q3 2014.
Net income for the quarter exceeded the healthcare providers and services industry average, increasing to $594.5 million. This represents a 14.6% increase in net income over the same period a year ago in which the company reported $518.60 million.
On top of the company’s superb financials, the firm boasts a trailing price-earnings ratio of just 15.08 – a 23.1% discount to the S&P 500 average P/E of 19.62.
The company’s forward P/E is just 12.63, while the company is priced at just 2.1x its book value – a 23.9% discount to the S&P 500 average.
But perhaps the best measure of Aetna’s value is its current EV/EBITDA ratio, which effectively gives us a takeover value of the company.
With a current ratio of just 7.4, Aetna is about 400 basis points lower than the median EV/EBITDA ratio for the entire S&P 500.
This means the company is priced right. And when combined with an aging population and the ever-increasing need for healthcare, Aetna is positioned to go much higher.
Good investing,
Richard Robinson
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