Humana Tops, Ups Guidance - Shares Dip

Humana Inc. ( HUM - Analyst Report ) reported first quarter fiscal 2010 earnings (excluding special items) of $1.19 per share above the Zacks Consensus Estimate of $1.14. The company earned $1.22 for the year-ago quarter.

The adjusted earnings were at the higher end of guidance provided by the company. For the first-quarter of 2010, Humana expected to earn between $1.10 and $1.20 per share.

On a reported basis, the company earned $1.52 per share. Results were inclusive of 37 cents from a greater-than-expected development of medical claims reserves coupled with 4 cents from higher tax costs pertaining to the recently enacted health reform legislation. The strong showing was helped by increased enrollment in its Medicare programs for the elderly.

Consolidated revenues for the reported quarter climbed 9.5% year-over-year to $8.44 billion. Revenues from premiums climbed 9.2% year-over-year to $8.2 billion, and administrative services fees climbed 8.6% year-over-year to $0.13 billion.

The increase in premiums and administrative services fees are attributable to the rise in membership for the health insurer’s Medicare Advantage plans and strict pricing across all the lines of business. The increase was partially offset by the decline in membership in the stand-alone Prescription Drug Plan (PDP) and commercial plans.

Commercial membership as of March 31, 2010, stood at 3,331,500, which reflected a 4% year-over-year decline. The decrease was primarily attributable to the economic downturn and the resultant rise in unemployment across several of Humana's fully-insured group medical lines of business.

Pretax income from the Government segment in the reported quarter increased 68% year-over-year to $279.2 million. Medicare Advantage membership climbed 19% year-over-year to about 1.7 million members. Revenue from the plans also climbed 19 % to $4.82 billion.

The latest quarter’s consolidated benefit ratio, which reflects the percentage of benefit expenses in premium revenues, decreased to 83.4% from 83.9% in the prior-year quarter. The decrease of 50 basis points was attributable to the reduction in benefit ratios in both the Government as well as the Commercial segment.

The cash flows from operations for the reported quarter stood at $755 million. Humana exited the quarter with cash and cash equivalents of $1.8 billion, compared to $1.9 billion a year ago.

Outlook

For the second-quarter of 2010, Humana expects to earn between $1.65 and $1.70 per share. The Zacks Consensus Estimate for the next quarter is $1.44. For fiscal 2010, the company has raised its outlook. It now expects to earn within $5.55 - $5.65 per share, compared to its previous guidance of $5.15 to $5.35 per share. The Zacks Consensus Estimate for fiscal 2010 is $5.52.

Furthermore, the company expects consolidated revenues in the range of $33.5 billion and $34.5 billion in 2010, compared to the prior outlook of $33 billion - $34 billion.

Our Recommendation

Even though the first quarter fiscal 2010 results were favorable based on strong earnings from the Government segment, we remain concerned about the weakness in the Commercial segment, whose membership fell 4% year-over-year. We currently have a Neutral outlook on Humana for the long-term implying that it will perform in line with the overall U.S. equity market over the next six to twelve months. We advise investors to retain the stock over that time period.