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Why Is Humana (HUM) Up 2.3% 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 added about 2.3% 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 Q4 Earnings Beat Estimates on Membership Growth

Humana’s fourth-quarter 2021 adjusted earnings per share of $1.24 surpassed the Zacks Consensus Estimate by a penny. The bottom line also improved from the year-ago loss of $2.30 per share.

The strong fourth-quarter earnings were supported by membership growth and higher premiums. Solid contribution from its Retail and Healthcare Services segments supported the bottom line.

Revenues of $21,054 million were up from $19,062 million in the prior-year quarter, thanks to individual Medicare Advantage and state-based contracts membership growth plus higher per member individual Medicare Advantage premiums and the impact of Kindred at Home revenues from external customers. Yet, the top line missed the Zacks Consensus Estimate of $21,186 million due to a decline in stand-alone prescription drug plan (PDP) and group commercial medical and group Medicare Advantage membership.

Operational Update

Benefit ratio declined 40 basis points (bps) to 87.9% for the fourth quarter. The decrease reflects the company’s tight rein on costs. Operating cost ratio declined to 16.1% from 16.3% a year ago.

Total expenses shot up 8.2% year over year to $20,993 million on higher benefits, operating costs, and depreciation and amortization costs.

The company’s net loss of $13 million improved from the year-ago loss of $274 million.

Segmental Results

Retail

Revenues of $18,411 million were up from $16,834 million a year ago. 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. Benefit ratio of 89% expanded from 87% in the prior-year quarter due to the termination of the non-deductible HIF in 2021 and the impact of the competitive nature of the group Medicare Advantage business.

The segment’s operating cost ratio of 11.5% contracted 250 bps year over year owing to the termination of the non-deductible HIF in 2021, lower COVID-related administrative costs, scale efficiencies related to growth in individual Medicare Advantage membership and operating cost efficiencies in the fourth quarter.

Group and Specialty

Revenues from this segment were $1,722 million, marginally down from the prior-year quarter’s $1,791 million level due to lower fully-insured group commercial membership.

Benefit ratio contracted 1,770 bps year over year to 86.6%, primarily due to pricing and benefit design efforts in 2021. Operating cost ratio contracted 130 bps year over year to 26.8% due to productivity initiatives and lower COVID-related administrative costs.

Healthcare Services

Revenues of $8,482 million increased from $7,291 million a year ago, primarily owing to individual Medicare Advantage membership growth and state-based contracts membership growth, the impact of Kindred at Home along with higher revenues related to the company’s provider business. Operating cost ratio decreased 290 bps year over year to 95%. This was owing to the impact of consolidated Kindred at Home operations and operational improvement in its provider service business primarily related to Conviva.

Financial Update (as of Dec 31, 2021)

HUM had cash and cash equivalents of $3,394 million, down from $4,673 million at 2020-end. Long-term debt of $10,541 million jumped from $6,060 million at 2020-end. It had a short -term debt of $1,953 million. Debt to total capitalization was 43.7%, expanding 1,100 bps from the level of Dec 31, 2020.

Net cash flows used in operating activities came in at $96 million, comparing unfavorably with the year-ago operating cash from operations of $283 million.

Capital Deployment

In January, Humana inked two separate deals with two third-party financial institutions to effect an aggregate $1-billion ASR program under its authorization. In the fourth quarter, the company didn’t buy back any shares. Last February, its board of directors approved a share buyback plan of $3 billion, with an expiration date of Feb 18, 2024. As of Feb 1, HUM had $2 billion remaining under the program.

It paid out cash dividends worth $91 million in the fourth quarter.

2022 Guidance

The company provided its 2022 guidance. Adjusted EPS is expected to be $24, pointing to an increase from the 2021 level of $20.64. Total revenues for 2022 are expected within $91.6-$93.2 billion, which indicates an improvement from $83.1 billion in 2021. Revenues from Retail, Group and Specialty, and Healthcare Services segments are expected at $81.2-$82.2 billion, $6.2-$6.7 billion, and $35.8-$36.3 billion, respectively.

For the full year, HUM expects individual Medicare Advantage membership to grow by 150,000-200,000 members. While the company expects Group Medicare Advantage membership to remain flat year over year, Medicare stand-alone PDP is likely to decline by 125,000 members.

Benefit ratio from the Retail segment is estimated at 86.6-87.6%, indicating a decline from 87.9% in 2021. The same from the Group and Specialty segment is expected at 78.3-78.8%, suggesting a significant decline from 82.5% in 2021.

Cash flow from operations is expected within $3-$3.5 billion, implying growth from $2.3 billion in 2021. Full-year capital expenditure is expected at $1.3 billion.

HUM has undertaken multiple initiatives like cost savings and others to generate $1 billion additional value to fund the Medicare Advantage business and boost Healthcare Services capabilities.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month.

The consensus estimate has shifted -10.04% due to these changes.

VGM Scores

At this time, Humana has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. However, the stock was allocated a grade of A on the value side, putting it in the top 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 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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