Humana, Inc. (HUM - Free Report) stock has long been an investor favorite owing to its strong fundamentals. Share repurchases and dividend payments at regular intervals have significantly contributed toward creating shareholders’ wealth. The company’s plans to buy backs shares worth $1.5 billion in first-quarter 2017 and the remaining $500 million through the rest of 2017 along with a 38% dividend hike deserve mention here. Over the last six months, Humana’s stock gained 22.5% compared with a 20% increase registered by the Zacks categorized Health Maintenance Organization (HMO) industry.
The company’s strong underwriting results have added to its profitability. In the fourth quarter of 2016, Humana’s earnings per share (EPS) of $2.09 beat the Zacks Consensus Estimate and also improved 35% year over year. The bottom-line growth was supported by improvement in the individual Medicare Advantage (MA) business as well as higher operating earnings at the Healthcare Services segment. The company now expects adjusted EPS in the range of $10.80–$11.00 in 2017.
Humana has been witnessing a consistent growth in revenues since 2002. In fact, the company’s revenues have increased at a 16% CAGR over the last 11 years. For 2016, the insurer reported total revenue of $54.96 billion, up 1.2% year over year.
The prospects of the company’s Medicaid business also look promising. Medical membership has grown at a five-year CAGR (2011–2016) of 6.6%. We note that a 3% increase in Individual Medicare Advantage and 9% growth in stand-alone PDP membership drove Healthcare services revenues in 2016, exceeding management’s expectations.
However, the stock looks overvalued from certain aspects. Its Price to Earnings Growth (PEG) ratio of 1.51 is above the industry level of 1.33. The Price to Sales (P/S) ratio of 0.58 is also higher than the industry average of 0.41. The Price to Cash Flow (PCF) ratio of 17.63 is also almost double the industry average of 9.86.
In addition, the company’s planned merger with Aetna Inc. (AET - Free Report) that has been blocked by the United States District Court, as was the case for the merger between Anthem Inc. (ANTM - Free Report) and Cigna Corp. (CI - Free Report) .
The company’s Group Medicare Advantage Business and Individual commercial business have also been underperforming. In 2016, Individualcommercial membership of 654,800 declined 27% year over year. Group Medicare Advantage membership also declined 27% to 355,400in 2016. The company plans to exit the Individual Commercial business in 2018.
The surprise victory of Donald Trump as the 45th U.S. President and the subsequent introduction of the American Healthcare Act (AHCA) replacing Obamacare has raised concerns for companies from this space and Humana is no exception. Obamacare had substantially boosted membership growth for health insurers and hence, its replacement by the new Republican health draft will lead to the discontinuation of the Affordable Care Act’s Medicaid expansion. This is expected to increase the number of uninsured plunging the entire medical sector into uncertainty.
Humana presently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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