Humana Downgraded to Neutral - Analyst Blog
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. ( ALPMY ), 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.
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