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We have maintained our Neutral recommendation on Humana Inc. (HUM - Analyst Report) based on its growing membership base, organic and inorganic expansion and strong cash position, which offset the headwinds faced by the company. This health maintenance organization carries a Zacks Rank #3 (Hold).

Why Reiterate?

Humana generated positive earnings surprise in the last four quarters, with an average surprise of 21.21%. Moreover, 8 out of 11 analysts raised their 2013 earnings estimate in the last 30 days, leading to a Zacks Consensus Estimate of $8.68. This represents a year-over-year improvement of 24.14%.

Moreover, on May 1, 2013, Humana reported first-quarter 2013 operating earnings of $407 million or $2.69 per share. The results substantially surpassed the Zacks Consensus Estimate of $1.78 as well as the year-ago earnings of $248 million or $1.49 per share.

Moreover, with the acquisitions of Arcadian, SeniorBridge, Concentra and MD Care, Humana has increased its focus on its core business as a health care provider, expanded its Medicare coverage, enhanced the quality of its healthcare services, expanded its provider network in various regions and reduced its exposure to health care overhaul regulations. Further, the strong cash position enabled the company to increase its quarterly dividend by 3.85% in Apr 2013, after a 4% dividend hike in Apr 2012.

These positives dwarf the headwinds such as high competition and increasing expenses. Humana has been incurring higher-than-expected expenses owing to increases in operating cost along with depreciation and amortization costs. Increased benefits have also led to deteriorating benefit ratios across most operating segments. Although operating expenses inched down marginally in the first quarter of 2013, operating expenses are expected to rise in the remaining part of the year.

Other Stock to Consider

While we maintain a cautious stance on Humana, other health maintenance organizations worth considering are Aetna Inc. (AET - Analyst Report) – Zacks Rank #1 (Strong Buy), Molina Healthcare Inc. (MOH - Analyst Report) – Zacks Rank #1 (Strong Buy) and Health Net Inc. (HNT - Analyst Report) – Zacks Rank #2 (Buy).

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