Humana Firmly on Top - Analyst Blog
September 07 2011 - 1:44PM
Zacks
We have
reiterated our Outperform recommendation on
Humana
Inc. (HUM) based on its consistent
operational performance despite the challenging regulatory and
economic environment.
The
company’s second-quarter operating earnings came in at $671.4
million or $2.50 per share, surpassing $566.4 million or $2.11 per
share in the year-ago quarter. This also compares favorably with
the Zacks Consensus Estimate of $2.07 per share.
The
better-than-expected results were attributable to higher
year-over-year earnings in Humana’s Retail and Health and
Well-Being Services business segments, which were partially
offset by lower earnings in the company’s Employer Group business
segment.
Humana’s Medicare business is witnessing a modest performance and
accounts for a majority of premiums and ASO fees. Besides, the
growing membership base provides it greater leverage to expand the
network of PPO and HMO providers.
Going
foreward, the projected acquisition
of AMS is further expected to expand Humana’s Medicare coverage and
enhance the quality of its healthcare services. The acquisition is
expected to be accretive to earnings beyond 2011.
Additionally, Humana’s
acquisition of Concentra and the joint venture with South
Africa-based Discovery Holdings Ltd. complement the company’s
long-term growth strategy. Humana is actively working on expanding
its size, not just through acquisitions, but also by increasing its
employee base. Going forward, the projected reinvestment
spending in the second half of 2011 will further accentuate
growth in 2012 and beyond.
The company’s investment portfolio also enjoys an
investment-grade rating from most rating agencies. Moreover, the
company’s debt-to-total capital ratio improved to 18.0% in the
second quarter of 2011 from 18.7% at the end of the prior quarter,
reflecting a modest investment and debt strategy.
Besides, Humana enjoys a strong cash and capital position that
enables it to absorb the capital
expenditure and add to shareholders value thereby, inspiring
confidence in the stock. The rising visibility of enhanced earnings
growth is also validated by the company's guidance, which was
recently raised.
However, risks related to the uncertain impact of healthcare
reforms, pricing pressure and intense competition from arch rivals
such as Aetna Inc.
(AET),
WellPoint
Inc. (WLP) and
Health
Net Inc. (HNT) remain the primary causes
of concern. Additionally, Humana has been incurring
higher-than-expected expenses owing to increases in depreciation
and amortization, interest and tax expenses along with operating
costs. Higher benefits have also led to deteriorating benefit
ratios across most operating segments.
Overall, given the higher scope for growth and ability to
mitigate risks related to operations and finances, the Zacks
Consensus Estimate for earnings is currently
pegged at $2.02 per share for the third quarter of 2011, implying
stability. For 2011, earnings are expected to grow about 7% year
over year to $7.68 per share.
Our
six-month target price of $89.00 equates to 11.6x our earnings
estimate for 2011. Combined with the $1.00 per share annual
dividend, the target price implies an expected total return of
20.7% over that period. This is consistent with our Outperform
recommendation on the stock.
Additionally, the
quantitative Zacks Rank for Humana is currently #1, indicating a
strong upward pressure on the shares over the near term.
AETNA INC-NEW (AET): Free Stock Analysis Report
HEALTH NET INC (HNT): Free Stock Analysis Report
HUMANA INC NEW (HUM): Free Stock Analysis Report
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