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Humana’s Government Business Impresses, High Costs a Drag


On Sep 21, 2016, we issued an updated research report on Humana Inc. HUM.

The Kentucky-based company is one of the largest health care plan providers in the United States. Last year, this internationally renowned insurer made it to the headlines due to its proposed acquisition by Aetna Inc. The merger, if successful, would have resulted in the formation of the second-largest managed care company in the nation. However, the future of the deal remains shrouded in uncertainty given the objection raised by the U.S department of Justice (DOJ).

Humana has been witnessing strong performances in Individual Medicare Advantage and Healthcare Services businesses over last few quarters. Consequently, it raised its guidance for the full year. Adjusted earnings per share for 2016 are now expected to be at least $9.25. Its Medicare business has also been outperforming over the past few years, primarily due to the operating initiatives that have started bearing fruit through favorable prior period medical claims development and lower current-year utilization.

Humana’s financial strength is backed by its solid cash balance. Effective control on debt financing also helped Humana manage its capital. The company’s focus on creating shareholders’ value through several capital deployment activities helped it cement investors’ confidence and drive long-term growth.

Nevertheless, Humana’s public exchange business continues to remain weak. This has compelled it to curtail the sale of Affordable Care Act (ACA) plans and halt the expansion of the business. The company’s group Medicare Advantage business has also been affected by low revenues and earnings due to its failure in overcoming the loss incurred on a large profitable account at the beginning of this year.

Moreover, Humana’s Individual commercial membership has been adversely impacted by the sudden increases in premiums as well as benefit redesigns effective since the start of this year. As a result, Humana now anticipates membership of this segment to decrease by 200,000 to 300,000.

The continuous increase in operating, depreciation and amortization costs that has resulted in higher benefit ratios is another headwind for the company.

Zacks Rank and Stocks That Warrant a Look

Humana currently carries a Zacks Rank #3 (Hold).

Investors can also look at some better ranked stocks from the same space like WellCare Health Plan Inc WCG, UnitedHealth Group Inc UNH and The Joint Corp JYNT. All of these stocks carry Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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