We are downgrading our recommendation on
) to Underperform, owing to the company's added focus on Medicare
Advantage plans that increases its revenue dependency on one
segment, rising expenditure, overhang of litigation charges and
increasing competition in the industry.
We believe the company needs to be prudent regarding its
expenditures and focus on its growth strategy through acquisitions
and diversify its sources of earning premiums to attract long-term
investors. Its second quarter earnings per share of $2.34 beat the
Zacks Consensus Estimate of $2.23. However, it lagged the year-ago
earnings of $2.59.
The year-over-year earnings decline was attributable to lower
pre-tax income in the Retail segment, which offset the earnings
growth in the Employer Group and Health and Well-being Services
segments. Improved medical and specialty memberships led to revenue
growth, which was offset by higher expenses and high benefit ratio
utilization, thus leading to reduced earnings guidance for 2012.
However, share buyback and dividend payment provided some respite.
Meanwhile, acquisitions are expected to enhance the company's
The rating downgrade is attributable to the company's
inefficiency in controlling its surging expenditures owing to
increases in operating cost along with depreciation and
amortization costs. Total operating expenses have continuously
augmented since 2009. It rose 4.9% year over year in 2009, 9.3% in
2010, 8.7% in 2011. Moreover, it climbed 6.8% year over year to
$9.11 billion in the second quarter of 2012.
Mounting number of lawsuits continues to adversely affect Humana
and simultaneously weigh on investors' sentiment and hinder the
company's goodwill at large. Moreover, Humana operates in a highly
competitive industry. Competitors always look to grab market share
by offering services at reduced prices.
However, on the brighter side, the company has been aggressively
strengthening its business platform over the last several years. It
has developed various products to meet the needs of employees who
are distressed by inflation in medical costs.
Humana also scores well with the rating agencies. Standard &
Poor's ("S&P") reiterated its long-term counterparty credit
rating (CCR) on Humana at 'BBB'. The outlook was also revised to
positive from stable. Earlier, in February 2012, Fitch affirmed the
company's Issuer Default Rating (IDR) at "BBB" and the rating of
its senior unsecured notes at "BBB-", along with a positive outlook
for all the ratings.
Humana currently retains a Zacks #4 Rank, which translates into
a short-term Sell rating. Its peers,
Unitedhealth Group, Inc.
) carries a short-term Zacks #2 Rank (Buy) while
) holds a short-term Zacks #3 Rank (Hold).
AETNA INC-NEW (AET): Free Stock Analysis Report
CIGNA CORP (CI): Free Stock Analysis Report
HUMANA INC NEW (HUM): Free Stock Analysis
UNITEDHEALTH GP (UNH): Free Stock Analysis
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