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On Jul 18, 2013, we raised Humana Inc. (HUM - Analyst Report) to Outperform based on the company’s strong financial position, membership growth in Medicare, stable ratings, and rapid expansion through acquisitions.

Why the Upgrade?

Humana has a strong history of outperforming earnings estimates. The company reported 4 straight quarters of positive earnings surprise with an average beat of 21.21%.

Humana has also maintained a strong cash and short-term investment position over the past several years. The strong cash position enabled the company to increase its quarterly dividend by 3.85% and replace its old share repurchase authorization with a new repurchase authorization worth $1 billion in Apr 2013.

Further, Humana’s Medicare business, which contributed 74% to the premium and service revenues in the first quarter of 2013, has been witnessing rising membership. The company has developed various commercial products to expand its business platform over the last several years.

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.

These positives offset Humana’s dependence on Medicare Advantage plans, rising expenses, the adverse impact of healthcare reforms and high competition.

We expect Humana to continue to outperform estimates in the second quarter of 2013. This is because Expected Surprise Prediction or ESP (Read:  Zacks Earnings ESP: A Better Method) is +1.63% and the stock carries Zacks Rank #1 (Strong Buy). Stocks with a positive ESP and a Zacks Rank #1, #2 or #3 have a significantly higher chance of beating earnings.

The Zacks Consensus Estimate for Humana’s second quarter 2013 earnings per share stands at $2.46, up 5.3% over the year-ago quarter. The company is expected to release its second-quarter financial results before the opening bell on Jul 31, 2013.

Other Stocks to Consider

Other health maintenance organizations worth considering are Heath Net Inc. (HNT - Analyst Report) – Zacks Rank #1 (Strong Buy), Molina Healthcare Inc. (MOH - Analyst Report) – Zacks Rank #1 (Strong Buy) and Aetna Inc. (AET - Analyst Report) – Zacks Rank #2 (Buy).

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