We have upgraded our recommendation on
Humana Inc.
(
HUM
) to 'Neutral' from 'Underperform' on the back enhanced
membership, earnings and Medicare coverage driven by strategic
acquisitions and alliances. Improved 2012 earnings guidance
also provides optimism. Strong financials and sturdy ratings are
the other positives.
Humana's third-quarter 2012 operating earnings per share
outperformed the Zacks Consensus Estimate by nearly 18%. The
company expects to deliver earnings in the range of $7.25-$7.35
per share in 2012. It raised the expectation from $6.90-$7.10 per
share guided earlier mainly due to favorable development in the
prior-year medical claims reserve and enhanced results in the
stand-alone prescription drug plan business.
Humana has maintained a strong cash and short-term investment
position over the past several years. The company has been
utilizing its excess cash to repurchase shares, pay dividends or
for other corporate purposes.
Additionally, with the acquisition of Arcadian, SeniorBridge,
Concentra and MD Care, Humana has increased its focus on its core
business as a health care provider, expanded its Medicare
coverage, enhanced the quality of its healthcare services,
expanded its provider network in various regions and reduced its
exposure to health care overhaul regulations. The deal to buy
Metropolitan Health, announced in November 2012, will add 35
state-of-the-art primary care medical centers to Humana's primary
care network.
Even the Certify Data Systems purchase in November 2012 should
facilitate the exchange of healthcare data between the company
and its patients. Moreover, the exclusive agreement with Veterans
of Foreign Wars (VFW), signed in October 2012, should boost
Humana's Medicare Advantage membership and premiums and services
revenue.
On the flip side, Humana has been incurring
higher-than-expected expenses owing to an increase in operating
cost along with depreciation and amortization costs. Increased
benefits have also led to deteriorating benefit ratios across
most operating segments. Total operating expenses have
continuously increased for the company since 2009.
Further, Humana is facing intense pricing pressure from
competitors, particularly from BlueCross BlueShield. Moreover,
since a significant portion of Humana's revenues are related to
federal government healthcare coverage programs, including the
Medicare, TRICARE and Medicaid programs, any adverse change in
the reimbursement rates could severely hamper the operating and
financial leverage of the company.
Overall, we believe that the company needs to follow prudent
expense management and focus on growth through acquisitions and
diversifying its earning sources to attract long-term investors.
Humana carries a Zacks #3 Rank (short-term Hold). Peer
Cigna Corp.
(
CI
) carries a Zacks #2 Rank (short-term Buy).
CIGNA CORP (CI): Free Stock Analysis Report
HUMANA INC NEW (HUM): Free Stock Analysis
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