Will GDP Revision Push Health Stocks Like Humana, Aetna Over a Cliff?

NEW YORK (TheStreet) -- Today's Q1 GDP report surprised many. The headline number -- overall U.S. GDP -- was chopped to a 2.9% annualized drop, down substantially from the previous reading of a 1.0% drop. That means that the economy is shrinking at a rate of nearly 3% a year.

By contrast, in the fourth quarter of 2013, GDP grew at an annualized 2.6%. This doesn't look good.

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According to Ian Shepherdson of Pantheon Economics, "Two-thirds of the revision is in consumption, cut to +1.0% from +3.1%. Almost all of this huge hit is in the health care services component, cut to -1.4% from +9.1%."

Estimates on health care spending seem to have been widely exaggerated if we believe in this huge revision downward in spending. Obamacare may have decreased health spending.

And with news like this, it is rather amazing that the health care sector is not selling off today.

Shares of Humana (HUM), UnitedHealth (UNH), Aetna (AET), Cigna (CI) and WellPoint (WLP) are all positive on the day. These stocks are up substantially this year, prompting a couple of big questions for investors.

Could today's revision downward in health care spending be a sign that trouble is ahead for the sector? Or does today's action in the sector tell us that the GDP revision downward is merely an anomaly that will again be revised in the coming weeks?

It will likely be some time before we know the real truth about the revisions today. Still, investors should be mindful of the risk this report suggests, especially given the large price appreciation in the sector so far this year.

Let's look at what TheStreet Ratings has to say about Humana and Aetna stocks.

TheStreet Ratings team rates HUMANA INC as a Buy with a ratings score of A. TheStreet Ratings Team has this to say about their recommendation:

"We rate HUMANA INC (HUM) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, attractive valuation levels, good cash flow from operations and solid stock price performance. We feel these strengths outweigh the fact that the company has had sub par growth in net income."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • Compared to its closing price of one year ago, HUM's share price has jumped by 50.40%, exceeding the performance of the broader market during that same time frame. Regarding the stock's future course, although almost any stock can fall in a broad market decline, HUM should continue to move higher despite the fact that it has already enjoyed a very nice gain in the past year.
  • Despite its growing revenue, the company underperformed as compared with the industry average of 16.8%. Since the same quarter one year prior, revenues rose by 11.7%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • HUM's debt-to-equity ratio is very low at 0.27 and is currently below that of the industry average, implying that there has been very successful management of debt levels. Along with the favorable debt-to-equity ratio, the company maintains an adequate quick ratio of 1.47, which illustrates the ability to avoid short-term cash problems.
  • Net operating cash flow has significantly increased by 62.86% to $671.00 million when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of 37.82%.

TheStreet Ratings team rates AETNA INC as a Buy with a ratings score of A+. TheStreet Ratings Team has this to say about their recommendation:

"We rate AETNA INC (AET) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its robust revenue growth, solid stock price performance, impressive record of earnings per share growth, compelling growth in net income and attractive valuation levels. We feel these strengths outweigh the fact that the company shows low profit margins."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth came in higher than the industry average of 16.8%. Since the same quarter one year prior, revenues rose by 46.7%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • Investors have apparently begun to recognize positive factors similar to those we have mentioned in this report, including earnings growth. This has helped drive up the company's shares by a sharp 31.68% over the past year, a rise that has exceeded that of the S&P 500 Index. Regarding the stock's future course, although almost any stock can fall in a broad market decline, AET should continue to move higher despite the fact that it has already enjoyed a very nice gain in the past year.
  • AETNA INC has improved earnings per share by 23.0% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, AETNA INC increased its bottom line by earning $5.35 versus $4.78 in the prior year. This year, the market expects an improvement in earnings ($6.50 versus $5.35).
  • The net income growth from the same quarter one year ago has exceeded that of the S&P 500 and greatly outperformed compared to the Health Care Providers & Services industry average. The net income increased by 35.8% when compared to the same quarter one year prior, rising from $490.10 million to $665.50 million.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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