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Humana (HUM) Up 3% Since Earnings Report: Can It Continue?

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A month has gone by since the last earnings report for Humana Inc. (HUM - Free Report) . Shares have added about 3% in that time frame.

Will the recent positive trend continue leading up to its next earnings release, or is HUM 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 drivers.

Humana (HUM - Free Report) Tops Q1 Earnings and Revenues, Lifts Guidance

Humana's first-quarter 2018 operating earnings per share of $3.36 beat the Zacks Consensus Estimate of $3.21. The bottom line also improved 22.2% year over year.

The company benefited from Medicare Advantage enrollment growth, solid segmental performances, lower taxes as well as a favorable impact of share buybacks.

Operational Update

Revenues of $14.3 billion were up nearly 6% on higher Retail revenues from the company’s Medicare Advantage business plus Group and Specialty segment. Moreover, the top line surpassed the Zacks Consensus Estimate of $14.2 billion.

Adjusted consolidated pre-tax income of $384 million declined 8.9%, primarily due to lower earnings in the company’s Retail and Healthcare segments. This was partially offset by higher earnings in the Group and Specialty segment. The prior-year quarter also benefited from net gain associated with terminated merger agreement.

Benefit ratio deteriorated 40 basis points to 84.9% in the reported quarter.

Operating cost ratio deteriorated 70 basis points to 12.4%.

Segment Results

Retail

Revenues from the Retail segment were $12.1 billion, up 6% year over year, primarily owing to higher revenues from the company’s Medicare Advantage business resulting from increased membership.

Benefit ratio of 87.4% improved 70 bps year over year, primarily owing to reinstatement of the non-deductible health fee.

The segment’s operating cost ratio of 10.1% deteriorated 170 bps year over year.

Adjusted pre-tax income was $273 million, down 27% year over year.

Group and Specialty

Revenues from the Group and Specialty segment were $1.97 billion, up 5% from the prior-year quarter, primarily backed by higher stop loss premiums related to small group level funded accounts, stronger service revenues and higher per member premiums.

Benefit ratio improved 240 bps year over year to 73.2% owing to the impact of the reinstatement of the health insurance industry fee.

Operating cost ratio deteriorated 200 bps year over year to 23.6%.

Adjusted pre-tax income of $212 million increased 23% year over year, driven by the company’s higher earnings related to fully insured business.

Healthcare Services

Revenues of $5.7 billion decreased 5% year over year, primarily due to exit from individual commercial business, lower Pharmacy Solutions intersegment revenues and lower revenues from  provider service business.

Operating cost ratio deteriorated 70 bps year over year to 96.2%.

Adjusted pre-tax income for the segment was $196 million, down 23% due to optimization process associated with the company’s chronic care management program and higher operating cost ratio.

Individual Commercial

Humana exited this business effective Jan 1, 2018 and thus, the result reflects run out of this business.

The company witnessed a pre-tax gain of $53 million, down 15.9% year over year.

Financial Update

As of Mar 31, 2018, the company had cash, cash equivalents and investment securities of $20.96 billion, up 28% from 2017-end level.

As of Mar 31, 2018, cash and short-term investments held by the parent company were $567 million, down 18% from 2017-end level.

Debt-to-total capitalization as of Mar 31, 2018 was 33.9%, up 60 bps from Dec 31, 2017.

Operating cash flow totaled $351 million, down from $1.1 billion in the year-ago quarter.

Dividend and Share Repurchase Update

The company did not buy back any shares in the quarter under review and has worth $2 billion remaining under its repurchase authorization.

The company paid cash dividends worth $57 million.

2018 Guidance Raised

Humana expects adjusted earnings per share in the range of $13.70- $14.10, up from $13.50-$14, guided earlier. GAAP EPS is projected between $13.54 and $13.94, up from the previous forecast of $13.16 and $13.66.

Total revenues are anticipated in the band of $55.8-$56.4 billion.

Cash flow from operations is estimated between $2.2 billion and $2.6 billion while capital expenditure is likely to be between $500 and $600 million.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. There have been seven revisions lower for the current quarter.

Humana Inc. Price and Consensus

 

Humana Inc. Price and Consensus | Humana Inc. Quote

VGM Scores

At this time, HUM has a great Growth Score of A, though it is lagging a bit on the momentum front with a B. The stock was also 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.

Based on our scores, the stock is equally suitable for value and growth investors while momentum investors may want to look elsewhere.

Outlook

Estimates have been broadly trending downward for the stock and the magnitude of these revisions indicates a downward shift. Notably, HUM has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.




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