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We have retained our Neutral recommendation on Humana Inc. (HUM - Analyst Report) as dependence on Medicare Advantage plans, rising expenses, adverse impact of healthcare reform and high competition will likely weigh on positives. The health service provider currently carries a Zacks Rank #3 (Hold).
Why Reiterate?

Increase in operating cost along with depreciation and amortization costs have increased Humana’s expenses over the past few years which in the long-term might affect the financials adversely. Humana depends on Medicare Advantage plans and is thus adversely affected by the healthcare reforms which reduce the sales of Medicare Advantage products.

Increased capital expenditure over the years and substantial increase in long-term debt in 2012 has hampered the cash flow of the company thereby raising question regarding the company’s future ability to engage in deleveraging activities. The company is also facing intense pricing pressure from competitors, particularly from BlueCross BlueShield

Nevertheless, counting on the positives, Humana’s premium and service revenues, and investment income showed improvement. The company’s Medicare business in collaboration with the Wal-Mart Stores allows Humana’s Medicare beneficiaries to save substantially more on an average on premiums, prescription medication co-payments and cost-shares from the previous drug plans. Moreover, strategic acquisitions and alliances coupled with new product launches have enhanced membership. Such moves provide the company with greater leverage to expand the network of Preferred Provider Organization (PPO) and Health Maintenance Organization (HMO) providers.

Further, Humana continues to increase shareholders value. In 2012, Humana deployed about $460 million through share buybacks.

Humana’s fourth-quarter operating earnings per share (EPS) of $1.19 breezed past the Zacks Consensus Estimate by 11.2%. However, results lagged the year-ago EPS by 1 cent. The year-over-year decline in earnings was attributable to lower pre-tax income in the company’s Retail, and Health and Well-Being Services segments, which were nearly offset by lower loss in Employer Group.

Following the earnings release the Zacks Consensus Estimate for 2013 has gone down 2.1% to $7.75 per share. However, the Zacks Consensus Estimate for 2014 has increased 0.1% to $8.55 per share as 2 of 12 estimates were raised.

Other Stocks to Consider

Among others from the industry, Aethlon Medical Inc. (AEMD), Cigna Corp. (CI - Analyst Report) and Coventry Healthcare Inc. carry a favorable Zacks Rank #2 (Buy).

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