On Jun 19, 2014, we issued an updated research report on
). We believe that the company's strong Medicare business,
expansion of business platform and stable credit ratings position
it to generate growth. However, rising expenses, overhang of
litigations, competitive pressure and high debt levels are
Earlier, Humana reported first-quarter 2014 earnings that surpassed
the Zacks Consensus Estimate. However, results compared unfavorably
with the year-ago quarter earnings due to the effects of
sequestration for Humana's Medicare business that was absent in the
first quarter of 2013, and higher expenses.
Humana has been performing well in its Medicare business that
covers Medicare Advantage and Medicare Part D Prescription Drug
Plan (PDP) contracts with the federal government. This business
accounted for approximately 75% of total premiums and service
revenues in the first quarter of 2014. Memberships have been
increasing in this business for years. The raised membership
guidance for 2014 further increases optimism.
Additionally, business platform expansion is expected to help this
Zacks Rank #3 (Hold) stock generate more revenues going forward.
The addition of the Kentucky Medicaid Contract, Florida LTSS
contract and the Florida LTSS contracts, commencement of offering
services in Illinois and Virginia in recent times further poise the
company to strengthen its business platform.
Humana is also a financially sound company, which helps it to
deploy its capital efficiently. This is evident from the 3.7%
dividend hike and new share repurchase authorization in Apr 2014.
The company also has strong ratings from credit rating agencies.
On the flip side, Humana has been incurring higher-than-expected
expenses owing to increase in operating, depreciation and
amortization costs. Additionally, higher drug cost trends around
the hepatitis-C drug costs will likely lead to rise in overall
expense for full-year 2014, thereby weighing on the company's
margins. The overhang of litigations also continues to pressure
Humana by increasing lawsuit settlement expenses and tarnishing the
goodwill of the company. Moreover, Humana faces intense pricing
pressure from competitors, particularly BlueCross BlueShield.
Additionally, Humana's high reliance on Medicare Advantage products
is likely to adversely affect the company, particularly when the
healthcare reform has reduced the selling season for the Medicare
Advantage plans. Additionally, based on the CMS provided medical
cost trend assumptions that relate to the Medicare Advantage
funding changes in 2015, Humana expects Medicare Advantage funding
to fall by 2%.
Other Stock to Consider
Investors interested in the healthcare services space could
consider better-ranked stocks like
Select Medical Holdings Corporation
WellCare Health Plans, Inc.
). While Select Medical and WellCare Health sport a Zacks Rank #1
(Strong Buy), Centene has a Zacks Rank #2 (Buy).
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HUMANA INC NEW (HUM): Free Stock Analysis
WELLCARE HEALTH (WCG): Free Stock Analysis
SELECT MEDICAL (SEM): Free Stock Analysis
CENTENE CORP (CNC): Free Stock Analysis Report
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