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Humana (HUM) Up 3.4% Since Last Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for Humana (HUM - Free Report) . Shares have added about 3.4% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Humana due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Humana's Q2 Earnings Surpass Estimates, Improve Y/Y

Humana's second-quarter 2020 operating earnings per share of $12.56 beat the Zacks Consensus Estimate by 21.5%. Moreover, the bottom line soared 107.6% year over year.

This upside can primarily be attributed to higher revenues witnessed by the company. However, Humana faced hospital admissions decline and lower utilization in April, which increased in May and June.

Operational Update

Revenues of $19 billion were up nearly 17.5% year over year. Moreover, the top line surpassed the Zacks Consensus Estimate by 2.5% on the back of better premium revenues from Medicare Advantage along with improved membership in state-based contracts and an increase in per member Medicare Advantage premiums.

Adjusted consolidated pre-tax income of $2.4 billion surged 122% year over year.

Benefit ratio contracted 800 basis points (bps) to 76.4%.

Operating cost ratio expanded 180 bps to 12.4%.

Segmental Results

Retail

Revenues from the Retail segment were $16.96 billion, up 20% year over year. This can primarily be attributed to premium rise owing to Medicare Advantage along with state-based contracts membership growth and higher per member Medicare Advantage premiums.

Benefit ratio of 78.3% contracted 690 bps year over year on temporary deferral of non-essential care amid the COVID-19 pandemic along with reinstatement of the non-deductible health insurance industry fee in 2020.
The segment’s operating cost ratio of 9.7% expanded 120 bps year over year due to reinstatement of the non-deductible health insurance industry fee in 2020 along with COVID-19-related costs.

Group and Specialty

Revenues from the Group and Specialty segment were $1.84 billion, down 2% from the prior-year quarter due to reduction in fully-insured group commercial membership.

Benefit ratio contracted 1930 bps year over year to 67% on temporary postponement of non-essential care amid the coronavirus outbreak along with reinstatement of the non-deductible HIF in 2020.

Operating cost ratio expanded 210 bps year over year to 23.8%.

Healthcare Services

Revenues of $6.94 billion increased 9% year over year, primarily owing to Medicare Advantage membership growth, better pharmacy revenues on the company’s allowance of early prescription refills and additional pharmacy revenues associated with the Enclara Healthcare buyout.

Operating cost ratio contracted 100 bps year over year to 95.1% on the back of operational improvements along with decreased utilization resulting from COVID-19 in the company's provider services business and operating cost efficiencies, driven by the previously disclosed productivity initiatives.

Financial Update

As of Jun 30, 2020, the company had cash and cash equivalents, and investment securities of $20 billion, up 33.1% from the level at 2019 end.
Debt-to-total capitalization as of Jun 30, 2020 was 35.1%, expanding 310 bps from the level as of Dec 31, 2019.

In the June quarter, cash flows provided by operating activities came in at $3.1 million, up 114% year over year.

Capital Deployment

The company did not complete any open-market transaction in the quarter under review.

It paid out cash dividends worth $83 million in the period.

2020 Guidance

After announcing second-quarter results, the company reaffirmed its 2019 guidance. Adjusted EPS is still expected in the range of $18.25-$18.75.

The full-year individual Medicare Advantage membership is now anticipated to be around 330,000-360,000 members, up from the earlier projected range of 300,000-350,000 members.

Humana reiterated its expectations for group Medicare Advantage net membership gains. It expects a year-over-year increase of 90,000 members in 2020. For its stand-alone PDP business, it anticipates a membership decline of 550,000.
 

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates revision.

VGM Scores

At this time, Humana has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Humana has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.


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