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Why Is Humana (HUM) Down 6.5% Since Last Earnings Report?

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A month has gone by since the last earnings report for Humana (HUM - Free Report) . Shares have lost about 6.5% in that time frame, underperforming the S&P 500.

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

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

Humana’s second-quarter 2021 operating earnings per share of $6.89 surpassed the Zacks Consensus Estimate by 0.4%. This was on the back of better revenues and a solid contribution from its Retail and Healthcare Services segments. The bottom line, however, declined 45.1% year over year.

Operational Update

Revenues of $20.6 billion were up 8.2% year over year owing to individual Medicare Advantage and state-based contracts membership growth plus higher per member individual Medicare Advantage premiums. The top line surpassed the Zacks Consensus Estimate by 0.7%.

Benefit ratio expanded 940 basis points (bps) to 85.8%.

Operating cost ratio contracted 210 bps to 10.3%.

Total expenses shot up 16.6% year over year on higher benefits, and depreciation and amortization costs.

Segmental Results

Retail

Revenues from the Retail segment were $18.55 billion, up 9% year over year.
This can primarily be attributed to a premium rise owing to individual Medicare Advantage along with state-based contracts membership growth and higher per member Medicare Advantage premiums. The impact of net of Medicare     Risk     Adjustment (MRA)    headwinds resulting from COVID-related utilization disruption also contributed to the same.

Benefit ratio of 87% expanded 870 bps year over year due to the termination of the non-deductible HIF in 2021 along with the impact related to the competitive nature of the group Medicare Advantage business, the impact of the deferral of non-essential care, net of COVID-19 treatment and testing expenses plus the pandemic-relief efforts made in the second quarter.

The segment’s operating cost ratio of 8.3% contracted 140 bps year over year on the back of termination of the non-deductible HIF in 2021, lower COVID-related administrative costs, scale efficiencies related to growth in individual Medicare Advantage membership and the operating cost efficiencies seen in the second quarter.

Group and Specialty

Revenues from this segment were $1.72 billion, down 6% from the prior-year quarter due to lower fully-insured group commercial membership.

Benefit ratio expanded 1560 bps year over year to 82.6% due to the significant impact of the deferral of non-essential care, COVID-related costs, termination of the non-deductible HIF.

Operating cost ratio expanded 10 bps year over year to 23.9%.

Healthcare Services

Revenues of $7.52 billion increased 8% year over year, primarily owing to individual Medicare Advantage membership growth and state-based contracts membership growth along with higher revenues related to the company’s provider business.

Operating cost ratio increased 70 bps year over year to 95.8%. This was due to higher administrative costs in the pharmacy operations, additional shipping costs incurred in pharmacy operations and higher utilization levels in the company’s provider business.

Financial Update (as of Jun 30, 2021)

The company had cash and cash equivalents of $3.4 billion, down 27.7% from the level at 2020 end.

Debt-to-total capitalization was 32.6%, contracting 10 bps from the level as of Dec 31, 2020.

Cash flows provided by operating activities came in at $360 million, comparing unfavorably with the year-ago quarter’s figure of $3 billion.

Capital Deployment

In December, Humana inked two separate deals with two third-party financial institutions to effect an aggregate $1.75-billion ASR program under its authorization.

In the second quarter, the company didn’t buy back any shares.

In February, its board of directors approved a share buyback plan of $3 billion with the expiration date of Feb 18, 2024.

It paid out cash dividends worth $90 million in the second quarter.

2021 Guidance

After announcing second-quarter results, the company reaffirmed its 2021 guidance. Adjusted EPS is still expected in the range of $21.25-$21.75.
For the full year, the company still expects individual Medicare Advantage membership growth of around 425,000-475,000 members.
 

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision. The consensus estimate has shifted -9.16% due to these changes.

VGM Scores

At this time, Humana has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of A on the value side, putting it in the top 20% 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 downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Humana has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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