Dear Mr. Berko:

– E.M., San Antonio

Dear E.M.:

Oscar E. Pfister, a Canadian health-care consultant who is advising members of Congress on reforming our health-care system, recommends the purchase of several small managed-care companies. Pfister believes that the following issues are positioned as potential takeover candidates by larger providers.

Though this group has done well and fundamentals look strong, there is a growing uncertainty in the air that’s making health-care executives nervous. They’re concerned about lower enrollments, which are a result of a soft economy and high unemployment rates. Many insurers are having trouble bolstering membership and maintaining premiums due to increased competition, changes in Medicare billing procedures and regulatory pushback.

They’re also concerned that the government will put pressure on their low margins and reduce Medicare spending. But the current demographics suggest that the health insurance industry should experience modest growth in the foreseeable future. The big guys might consider these small managed-care companies to be attractive takeover candidates:

Centene Corp. (CNC-$43.45) is a $5.3 billion revenue managed-care company with 1.5 million members. In the past five years, net income has grown nearly 50 percent on 40 percent growth in revenues. This year, CNC should grow earnings to $2.20 per share from $1.66 on higher revenues of $7.3 billion. A possible takeover price might be between $53 and $56.

WellCare Health Plans Inc. (WCG-$58.64) is a $6.1 billion revenue company with 1.5 million Medicaid members, 811,000 Prescription Drug Plan members and 132,000 Medicare Advantage members. Earnings have been all over the map. A takeover price could be about 25 percent higher than the current market price.

Molina Healthcare Inc. (MOH-$27.53) has 1.6 million Medicare, Medicaid and other government health care-eligible members. Revenues for 2012 are expected to be $5.5 billion – up from $4.6 billion in 2011. MOH could be worth $35 to $39 on a takeover.

Health Net Inc. (HNT-$35.96) is an $11.7 billion revenue health-care company with more than 6 million members in Medicare, Medicaid, VA and Tricare programs. Revenues will be lower this year, but better operating margins should push 2012 earnings to $3.32 per share, up from $3.04 last year. A takeover could happen at $40 to $44 a share.

Finally, Coventry Health Care Inc. (CVH-$30.73), which has 6.5 million insured people on its books, expects revenues of $13.7 billion for 2012, which is up 10 percent from last year. Per-share earnings for this $4.6 billion market-cap company should be up 8 percent to $3.35 for 2012. A takeover could move CVH to $38.

Pfister, who is also bullish on Pfizer Inc. (PFE-$21.78), suggests you invest an equal amount of money in all five insurers and recommends Pfizer as a long-term investment.

© 2012 Creators.com