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Humana (HUM) May Beat Q2 Earnings: Will the Stock Gain?

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We expect Humana Inc. (HUM - Free Report) to beat expectations when it reports second-quarter 2016 results on Aug 3, before the market opens.

Why a Likely Positive Surprise?

Our proven model shows that Humana has the right combination of two key ingredients to beat estimates.
Zacks ESP: Humana has an Earnings ESP of +0.44%. This is because the Most Accurate estimate is pegged at $2.27, while the Zacks Consensus Estimate stands at $2.26. A positive ESP is a meaningful and leading indicator of a likely earnings beat.

Zacks Rank: Humana holds a Zacks Rank #2 (Buy). Note that stocks with a Zacks Rank of #1 (Strong Buy), 2 or 3 (Hold) have a significantly higher chance of beating earnings.

Conversely, the Sell-rated stocks (Zacks Rank #4 and 5) should never be considered going into an earnings announcement, especially when the company is seeing negative estimate revisions.  

Currently, the stock is trading at $171.18. We expect the release to lead to stock movement.

What is Driving the Better-Than-Expected Earnings?

Humana’s operational performance is expected to have been robust in the second quarter due to improved Individual Medicare Advantage and Healthcare Services businesses. Based on this, the company has revised its adjusted earnings per share guidance to $2.28 from at least $2.15 expected earlier.

Medicare Advantage is likely to have benefited from operating initiatives. Management noted these efforts have driven favorable prior period medical claims development and lower current-year utilization. On the other hand, management noted better-than-expected pharmacy business have fueled improved performance in Healthcare Services business. Increased mail order penetration, along with favorable rebates and generic purchasing discounts, have been the catalysts for improved pharmacy business.

The Group Medicare Advantage business is also anticipated to deliver strong results.

Humana is expected to have witnessed membership growth in its Medicare Part D Prescription Drug Plan (PDP), which is part of its Medicare business.

Nonetheless, new challenges in the company’s individual commercial medical (Individual) business are headwinds.

Management estimates premium deficiency reserve (PDR) to increase at 86 cents per diluted common share in the second quarter. The company also now expects transaction and integration costs to be 16 cents per share.

Net pre-tax expense in the first half of 2016 is estimated to be about $52 million. Amortization cost for the second quarter is expected to be 9 cents.

With respect to the surprise trend, the company beat estimates in three of the last four quarters, with an average positive surprise of 1.49%.

HUMANA INC NEW Price and EPS Surprise

HUMANA INC NEW Price and EPS Surprise | HUMANA INC NEW Quote

Stocks to Consider

Humana is not the only company looking up this earnings season. Here are some companies from the medical sector that you may want to consider as these too have the right combination of elements to post an earnings beat this quarter:

Ani Phermaceuticals Inc. (ANIP - Free Report) has an Earnings ESP of +2.63% and a Zacks Rank #1. The company is set to report second-quarter earnings on Aug 4.

Aetna Inc. has an Earnings ESP of +3.32% and a Zacks Rank #2. The company is set to report second-quarter earnings on Aug 2.

Aliqua Biomedical Inc an Earnings ESP of +4.17% and a Zacks Rank #3. The company is slated to report second-quarter earnings on Aug 9.

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