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We have retained our Neutral recommendation on Humana Inc. (HUM - Analyst Report) following mixed third quarter results. This health care plan provider carries a Zacks Rank #3 (Hold).

Why the Reiteration?

Although Humana’s operating earnings of $2.31 per share for the third quarter of 2013 surpassed the Zacks Consensus Estimate of $2.16, results declined from the year-ago earnings of $2.62 per share. Revenues, however, increased year-over-year and exceeded the Zacks Consensus Estimate on higher premiums and service revenues.

Improvement in the Medicare business that covers Medicare Advantage and Medicare Part D Prescription Drug Plan (PDP) remained impressive so far as it contributed almost 74% to the premium and service revenues in the first nine months of 2013. Membership is slated to improve driven by contracts with various states expected to be assigned in the second half of 2014.

Further, Humana has created newer commercial products from time to time to enhance its product portfolio and has undertaken acquisitions to strengthen its core business. Investment in initiatives like the Humana Chronic Cares Program and in-home care for Humana members, have fetched solid financial returns over the last 18 months, with higher returns expected in the upcoming period as well. Moreover, the pending acquisition of American Eldercare should enhance the core capabilities of Humana. The company’s recent Accountable Care agreement with St. Luke’s University Health Network is in sync with its agenda to provide high-quality care to medical members at an affordable price. Humana’s strong financial position has enabled the company to undertake such initiatives. Humana also scores strongly with credit rating agencies.

On the tepid side, Humana’s higher-than-expected expenses are a concern for the company as they might have a negative impact on its financial position going forward. An expected increase in medical costs in the Employer segment in 2014 is expected to mar company financials partially going forward. Also, upcoming changes like a ban on annual and lifetime coverage caps, annual fees on health insurance companies and excise tax on high premium insurance policies, will likely increase expenses further.

A significant part of Humana’s revenues are related to federal government health care coverage programs, including the Medicare, TRICARE and Medicaid programs. Thus, an adverse change in reimbursement rates could severely hamper the operating and financial leverage of the company. Further, the overhang of lawsuits and the U.S. economic weakness poses additional risk and might hurt investor confidence on the stock.    

Other Stocks to Consider

Some better-ranked stocks in the healthcare services space include VCA Antech Inc. (WOOF - Snapshot Report), HCA Holdings Inc. (HCA - Snapshot Report) and HEALTHSOUTH Corp. (HLS - Snapshot Report). All these stocks carry a Zacks Rank #2 (Buy).

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