On Sep 4, 2013, we downgraded our recommendation on
) to Neutral from Outperform despite decent second quarter
results due to several operational issues being faced by the
company. This health care plan provider currently carries a Zacks
Rank #3 (Hold).
Why the Downgrade?
Humana' second-quarter earnings came in at $2.63 per share, ahead
of the Zacks Consensus Estimate of $2.46 by 6.9%. Earnings also
grew 21.8% year over year. The strong performance in the
company's Retail, Employer Group, Healthcare Services and Other
Business segments led to the increase in income. Revenues during
the quarter also climbed 6.4% year over year but marginally
lagged the Zacks Consensus Estimate.
However, the ever rising expenses and the waning operating cash
flow raise concern. Higher operating costs have always been
a matter of concern for Humana. In the first half of 2013
operating expenses surged 2.3%.
Moreover, there is a rise in membership from people with
pre-existing medical conditions and government plans have put
restriction on charging higher premiums from these people. As a
result benefit expenses are also rising and are taking a toll on
Humana is also facing probe on certain aspects related to
Medicare and Medicaid operations in the Florida region that might
dampen investors' sentiment. Capital expenditures of Humana are
also increasing and for 2013 it is expected to rise by 3.7%-9.8%
over that of 2012.
All these coupled with U.S. economic weakness account for the
waning operating cash flow of Humana. The first half of 2013 also
suffered significant decline in operating cash flow.
Additionally, the health care reform is weighing on the sale of
Medicare Advantage plans on which Humana is largely reliant.
Moreover, the establishment of the minimum medical loss ratios is
increasing the costs of healthcare companies.
Further, implementation of programs from 2014, such as the ban
on annual and lifetime coverage caps, annual fees on health
insurance companies and excise tax on high premium insurance
policies, will likely increase expenses. All these are likely to
pressurize profits going forward.
However, growth in Medicare membership and stable ratings of the
company are some attributes worth mentioning. Its competitive
pricing and strategic alliances with companies like
Astellas Pharma Inc.
), Boehringer Ingelheim Pharmaceuticals, and Greenway Medical
Technologies Inc. in the first half of 2013 are expected to help
it improve memberships further.
Alongside, it is seeking growth through the inorganic path.
With this motive, it entered into an agreement to acquire
American Eldercare Inc., one of the leading nursing home
diversion services providers in Florida.
Other Stocks to Consider
Among other health care providers,
) carry a favorable Zacks Rank #2 (Buy).
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HUMANA INC NEW (HUM): Free Stock Analysis
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