We have upgraded our recommendation on Humana Inc. (HUM) to Outperform from Neutral on its robust top-line growth, sturdy cash position and substantial membership increase. We are also optimistic about the expected benefits from the company’s latest acquisitions.
Humana has been on an acquisition spree since mid-2011 and has been rapidly growing, with special focus on the expansion of its Medicare business. The company is actively working on expanding its size, not just through acquisitions, but also by increasing its employee base.
The acquisitions will be accretive to Humana’s revenues and will also lead to inorganic membership growth and enable the company to expand its Medicare coverage. In fact, the boost in enrollment due to the acquisitions has enabled Humana to project higher Medicare Advantage membership growth in 2012.
Humana is already the fifth-largest health insurer on enrollment basis. The first and second positions are occupied by WellPoint Inc. (WLP) and UnitedHealth Group Inc. (UNH), respectively.
Additionally, Humana has a strong balance sheet with substantial surplus cash and investment securities. The company’s investment portfolio also enjoys an investment-grade rating from most rating agencies.
On the flip side, Humana remains heavily reliant on Medicare Advantage for revenue generation. Although full year figures are not available at present, the company derived about 60.5% of its health-insurance premium revenue in the first nine months of 2011 from its Medicare Advantage plans. Thus, any reimbursement rate cut can significantly reduce the company’s total revenue.
Moreover, Humana has been incurring higher-than-expected expenses primarily due to increased operating costs along with elevated depreciation and amortization, interest and tax expenses. Increased benefits have also led to deteriorating benefit ratios across most operating segments. Additionally, the cost of increasing the employee base will likely exert significant pressure on margins.
Overall, we believe that the efficient growth strategy through acquisitions, stable ratings and a strong investment portfolio will likely attract long-term investors for Humana. The company currently carries a Zacks #1 Rank, implying a short-term Strong Buy rating.
The Zacks Consensus Estimate for Humana’s fourth-quarter 2011 earnings currently stands at $1.19 per share, down 28% from the year-ago quarter. For the full year 2011, the Zacks Consensus Estimate stands at $8.43 per share, up about 17% from 2010.
HUMANA INC NEW (HUM): Free Stock Analysis Report
UNITEDHEALTH GP (UNH): Free Stock Analysis Report
WELLPOINT INC (WLP): Free Stock Analysis Report
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