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Humana (HUM) Down 5.2% Since Last Earnings Report: Can It Rebound?
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A month has gone by since the last earnings report for Humana (HUM - Free Report) . Shares have lost about 5.2% 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 drivers.
Humana Q2 Earnings Beat on Strong Individual MA Unit
Humana reported second-quarter 2023 adjusted earnings per share (EPS) of $8.94, which beat the Zacks Consensus Estimate by a whisker. The bottom line grew 2.1% year over year. Its shares gained 5% in the pre-market trading session, reflecting the outperformance.
HUM’s adjusted revenues advanced 14.2% year over year to $25,733 million. Yet, the top line missed the consensus mark by a whisker.
The quarterly results benefited on the back of a solid individual Medicare Advantage business and expanding membership through state-based contracts. Improved per member individual Medicare Advantage premiums also contributed to the upside, which was partly offset by an elevated operating expense level.
Operational Update
Total premiums of Humana amounted to $25,495 million, which improved 14.5% year over year in the second quarter and outpaced our estimate of $24,545 million.
Services revenue declined 27.5% year over year to $978 million and also missed our estimate of $987.7 million. Investment income of $274 million increased nearly six-fold year over year in the quarter under review.
The benefits expense ratio came in at 86.3%, which deteriorated 50 basis points (bps) year over year due to investments related to benefit design of HUM’s products as well as increased utilization trends in the Medicare Advantage business. The operating cost ratio improved 160 bps year over year to 11.8%, thanks to divestiture of the 60% ownership interest of Humana in the Gentiva Hospice business, which was earlier known as Kindred, in August 2022.
Total operating expenses of $25,311 million increased 12.8% year over year and came higher than our estimate of $24,190.8 million. The increase was mainly due to higher benefits expense.
Humana reported a net income of $956 million in the second quarter, which climbed 37.2% year over year but lagged our estimate of $1,086 million.
Segmental Update
Insurance
The segment’s revenues rose 14.8% year over year to $25,875 million in the quarter under review, higher than our estimate of $24,902.9 million.
Operating income of $1,031 million decreased 6.9% year over year and fell short of our estimate of $1,138.3 million. The benefits expense ratio deteriorated 70 bps year over year to 86.8%. The operating cost ratio of 9.9% deteriorated 50 bps year over year due to higher commissions, which had to be paid to brokers in view of the substantial membership growth witnessed in Humana’s individual Medicare Advantage business.
As of Jun 30, 2023, total medical membership of the segment came in at 17.1 million. The figure dipped marginally year over year.
CenterWell
The segment recorded revenues of $4,530 million in the second quarter, which inched up marginally year over year but missed our estimate of $4,532.2 million. Improved pharmacy revenues and a solid provider business provided an impetus to the segment's quarterly performance.
Operating income dropped 19.8% year over year to $287 million. The segment’s operating cost ratio of 92.6% deteriorated 150 bps year over year in the quarter under review.
Financial Update (as of Jun 30, 2023)
Humana exited the second quarter with cash and cash equivalents of $16,214 million, which increased more than three-fold from the figure at 2022 end. Total assets of $56.5 billion climbed 31.1% from the 2022-end level.
Long-term debt amounted to $9,722 million, which increased 7.6% from the figure as of Dec 31, 2022. Short-term debt came in at $2,022 million. Debt to total capitalization improved 430 bps year over year to 41% at the second-quarter end.
Total stockholders’ equity of $16,834 million increased nearly 10% from the figure at 2022 end.
In the first half of 2023, HUM generated operating cash flows of $9,863 million, which increased nearly eight-fold from the prior-year comparable period.
Capital Deployment Update
Humana bought back shares worth $529 million in the second quarter. It had a leftover share repurchase capacity of $2.2 billion as of Aug 1, 2023. HUM also paid out dividends of $111 million to its shareholders during the quarter under review.
2023 Outlook
Revenues are reaffirmed to stay within $104.4-$106.4 billion, the midpoint of which indicates an improvement of 13.5% from the 2022 figure.
Adjusted EPS continue to be projected at a minimum of $28.25, which suggests growth of at least 11.9% from the 2022 figure. However, GAAP EPS is presently estimated to be a minimum of $26.91, down from the previous guidance of at least $27.88.
The Insurance segment’s GAAP revenues continue to be forecasted between $101.2 billion and $102.7 billion. Revenues of the CenterWell segment, on a GAAP basis, continue to be expected within $18-$18.5 billion.
Management currently projects individual Medicare Advantage membership to witness a minimum growth of 825,000 this year, up from the prior expectation of a minimum growth of 775,000.
Group Medicare Advantage membership is still expected to decrease by around 60,000. Membership from the Medicare stand-alone prescription drug plan is estimated to decline by around 700,000 members, while the earlier view called for the metric to fall by around 800,000 members.
The benefit ratio of the Insurance unit is reaffirmed to stay in the 86.3-87.3% band for 2023. The consolidated GAAP operating cost ratio is still anticipated to lie between 11.6% and 12.6%.
Cash flow from operations is reaffirmed at around $4.5 billion this year. Meanwhile, capital expenditures are projected to be roughly $1.2 billion.
2025 Target
Humana remains optimistic to attain its target of adjusted EPS of $37 in 2025.
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 -7.19% 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.
Performance of an Industry Player
Humana belongs to the Zacks Medical - HMOs industry. Another stock from the same industry, Molina (MOH - Free Report) , has gained 2.6% over the past month. More than a month has passed since the company reported results for the quarter ended June 2023.
Molina reported revenues of $8.33 billion in the last reported quarter, representing a year-over-year change of +3.4%. EPS of $5.65 for the same period compares with $4.55 a year ago.
For the current quarter, Molina is expected to post earnings of $4.87 per share, indicating a change of +11.7% from the year-ago quarter. The Zacks Consensus Estimate has changed -0.1% over the last 30 days.
Molina has a Zacks Rank #2 (Buy) based on the overall direction and magnitude of estimate revisions. Additionally, the stock has a VGM Score of A.
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Humana (HUM) Down 5.2% Since Last Earnings Report: Can It Rebound?
A month has gone by since the last earnings report for Humana (HUM - Free Report) . Shares have lost about 5.2% 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 drivers.
Humana Q2 Earnings Beat on Strong Individual MA Unit
Humana reported second-quarter 2023 adjusted earnings per share (EPS) of $8.94, which beat the Zacks Consensus Estimate by a whisker. The bottom line grew 2.1% year over year. Its shares gained 5% in the pre-market trading session, reflecting the outperformance.
HUM’s adjusted revenues advanced 14.2% year over year to $25,733 million. Yet, the top line missed the consensus mark by a whisker.
The quarterly results benefited on the back of a solid individual Medicare Advantage business and expanding membership through state-based contracts. Improved per member individual Medicare Advantage premiums also contributed to the upside, which was partly offset by an elevated operating expense level.
Operational Update
Total premiums of Humana amounted to $25,495 million, which improved 14.5% year over year in the second quarter and outpaced our estimate of $24,545 million.
Services revenue declined 27.5% year over year to $978 million and also missed our estimate of $987.7 million. Investment income of $274 million increased nearly six-fold year over year in the quarter under review.
The benefits expense ratio came in at 86.3%, which deteriorated 50 basis points (bps) year over year due to investments related to benefit design of HUM’s products as well as increased utilization trends in the Medicare Advantage business. The operating cost ratio improved 160 bps year over year to 11.8%, thanks to divestiture of the 60% ownership interest of Humana in the Gentiva Hospice business, which was earlier known as Kindred, in August 2022.
Total operating expenses of $25,311 million increased 12.8% year over year and came higher than our estimate of $24,190.8 million. The increase was mainly due to higher benefits expense.
Humana reported a net income of $956 million in the second quarter, which climbed 37.2% year over year but lagged our estimate of $1,086 million.
Segmental Update
Insurance
The segment’s revenues rose 14.8% year over year to $25,875 million in the quarter under review, higher than our estimate of $24,902.9 million.
Operating income of $1,031 million decreased 6.9% year over year and fell short of our estimate of $1,138.3 million. The benefits expense ratio deteriorated 70 bps year over year to 86.8%. The operating cost ratio of 9.9% deteriorated 50 bps year over year due to higher commissions, which had to be paid to brokers in view of the substantial membership growth witnessed in Humana’s individual Medicare Advantage business.
As of Jun 30, 2023, total medical membership of the segment came in at 17.1 million. The figure dipped marginally year over year.
CenterWell
The segment recorded revenues of $4,530 million in the second quarter, which inched up marginally year over year but missed our estimate of $4,532.2 million. Improved pharmacy revenues and a solid provider business provided an impetus to the segment's quarterly performance.
Operating income dropped 19.8% year over year to $287 million. The segment’s operating cost ratio of 92.6% deteriorated 150 bps year over year in the quarter under review.
Financial Update (as of Jun 30, 2023)
Humana exited the second quarter with cash and cash equivalents of $16,214 million, which increased more than three-fold from the figure at 2022 end. Total assets of $56.5 billion climbed 31.1% from the 2022-end level.
Long-term debt amounted to $9,722 million, which increased 7.6% from the figure as of Dec 31, 2022. Short-term debt came in at $2,022 million. Debt to total capitalization improved 430 bps year over year to 41% at the second-quarter end.
Total stockholders’ equity of $16,834 million increased nearly 10% from the figure at 2022 end.
In the first half of 2023, HUM generated operating cash flows of $9,863 million, which increased nearly eight-fold from the prior-year comparable period.
Capital Deployment Update
Humana bought back shares worth $529 million in the second quarter. It had a leftover share repurchase capacity of $2.2 billion as of Aug 1, 2023. HUM also paid out dividends of $111 million to its shareholders during the quarter under review.
2023 Outlook
Revenues are reaffirmed to stay within $104.4-$106.4 billion, the midpoint of which indicates an improvement of 13.5% from the 2022 figure.
Adjusted EPS continue to be projected at a minimum of $28.25, which suggests growth of at least 11.9% from the 2022 figure. However, GAAP EPS is presently estimated to be a minimum of $26.91, down from the previous guidance of at least $27.88.
The Insurance segment’s GAAP revenues continue to be forecasted between $101.2 billion and $102.7 billion. Revenues of the CenterWell segment, on a GAAP basis, continue to be expected within $18-$18.5 billion.
Management currently projects individual Medicare Advantage membership to witness a minimum growth of 825,000 this year, up from the prior expectation of a minimum growth of 775,000.
Group Medicare Advantage membership is still expected to decrease by around 60,000. Membership from the Medicare stand-alone prescription drug plan is estimated to decline by around 700,000 members, while the earlier view called for the metric to fall by around 800,000 members.
The benefit ratio of the Insurance unit is reaffirmed to stay in the 86.3-87.3% band for 2023. The consolidated GAAP operating cost ratio is still anticipated to lie between 11.6% and 12.6%.
Cash flow from operations is reaffirmed at around $4.5 billion this year. Meanwhile, capital expenditures are projected to be roughly $1.2 billion.
2025 Target
Humana remains optimistic to attain its target of adjusted EPS of $37 in 2025.
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 -7.19% 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.
Performance of an Industry Player
Humana belongs to the Zacks Medical - HMOs industry. Another stock from the same industry, Molina (MOH - Free Report) , has gained 2.6% over the past month. More than a month has passed since the company reported results for the quarter ended June 2023.
Molina reported revenues of $8.33 billion in the last reported quarter, representing a year-over-year change of +3.4%. EPS of $5.65 for the same period compares with $4.55 a year ago.
For the current quarter, Molina is expected to post earnings of $4.87 per share, indicating a change of +11.7% from the year-ago quarter. The Zacks Consensus Estimate has changed -0.1% over the last 30 days.
Molina has a Zacks Rank #2 (Buy) based on the overall direction and magnitude of estimate revisions. Additionally, the stock has a VGM Score of A.