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Humana (HUM) Up 3.2% Since Earnings Report: Can It Continue?

A month has gone by since the last earnings report for Humana Inc.HUM . Shares have added about 3.2% in that time frame.

Will the recent positive trend continue leading up to its next earnings release, or is HUM due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Humana Tops Q4 Earnings & Revenues, Issues '18 View

Humana's fourth-quarter 2017 operating earnings per share of $2.06 beat the Zacks Consensus Estimate by approximately 3%. The bottom line, however, declined 12% year over year.

Adjusted consolidated pretax income of $576 million declined 17% in the fourth quarter primarily due to lower earnings in the company's Retail and Healthcare segments. This was partially offset by higher earnings in the Group and Specialty segment.

In the fourth quarter, the company reported revenues of $13.2 billion, up 2.4% on higher Retail segment revenues from the company's Medicare Advantage business and Group and Specialty segment. Revenues also surpassed the Zacks Consensus Estimate by 1.2%.

Full-Year Update

The company reported adjusted earnings of $11.71 per share, up 7.2% year over year. Full-year earnings also surpassed Zacks Consensus Estimate of $11.63.

Revenues came in at $53.8 billion, down 1% year over year due to lower revenues from Individual Commercial segment, partially offset by Retail segment revenues.

Quarterly Operational Update

Humana's adjusted consolidated benefit ratio of 83% deteriorated 200 basis points (bps) from the prior-year quarter.

Adjusted consolidated operating cost ratio of 13.9% improved 100 bps from the year-ago quarter.

Q4 Segment Results

Retail

Revenues from the Retail segment were $10.95 billion, up 3% year over year, primarily owing to higher revenues from the company's Medicare Advantage business resulting from increased membership.

Benefit ratio of 84.2% deteriorated 130 bps year over year, primarily due to the impact of the temporary suspension of the health insurance industry fee in 2017.

The segment's operating cost ratio of 11.8% improved 100 bps year over year because of the same reason.

Adjusted pretax income was $397 million, down 8% year over year.

Group and Specialty

Revenues from the Group and Specialty segment were $1.89 billion, up 3% from the prior-year quarter, primarily due to higher performance incentives earned under the previous TRICARE contract and increased group fully insured commercial medical premiums.

Benefit ratio deteriorated 250 bps year over year to 83.1%, due to the impact of the temporary suspension of the health insurance industry fee in 2017.

Operating cost ratio improved 260 bps year over year to 21.9% due to the temporary suspension of the health insurance industry fee in 2017 and operating cost efficiencies.

Adjusted pretax income of $48 million substantially increased 300% year over year driven by the company's higher earnings related to fully insured business. Also higher earnings from the company's military service business resulting from the TRICARE contract drove the upside.

Healthcare Services

Revenues of $6.02 billion decreased 6% year over year, primarily due to the company's Pharmacy Solutions business as well as the impact of the optimization process associated with its chronic condition management programs.

Operating cost ratio deteriorated 60 bps year over year to 96%.

Adjusted pretax income for the segment was $227 million, down 19% due to optimization process associated with the company's chronic care management program and higher operating cost ratio.

Individual Commercial

Individual Commercial membership was 128,800 as of Dec 31, 2017, down 80% year over year, primarily due to a decline in number of countries where the company offers on-exchange coverage as well as the discontinuance of off-exchange products .

Benefit ratio came in at 80.3% compared with 285.3% in the fourth quarter of 2016. The year-over-year improvement primarily resulted from the planned exit from certain markets with higher benefit ratio and premium increases.

The segment's operating cost ratio came in at 25.9%, down from 51.3% in the year-ago quarter. The improvement was primarily driven by the loss of scale efficiency from market exits in 2017.

The company witnessed a pretax loss of $14 million in the quarter, narrower than the pretax loss of $634 million in the prior-year quarter.

Financial Update

As of Dec 31, 2017, the company had cash, cash equivalents and investment securities of $16.34 billion, down 23% sequentially.

As of Dec 31, 2017, cash and short-term investments held by the parent company was $688 million, down 70% sequentially.

Debt-to-total capitalization as of Dec 31, 2017 was 33.3%, up 280 bps from Sep 30, 2017.

Cash flows provided by operations totalled $4.05 billion for 2017 compared with $1.94 billion in the prior year. The improvement was positively impacted by the receipt of merger termination fee, higher earnings and the timing of working capital items.

Share Repurchase Update

In December 2017, Humana's board of directors approved a $3 billion share repurchase authorization, which will expire on Dec 31, 2020.

The company subsequently entered into an agreement with a third-party financial institution on Dec 21, 2017 to bring into effect a $1 billion ASR program under the authorization.

In 2017, the company bought back shares worth $3.1 billion.

As of Feb 6, 2018, the company had nearly $2 billion of current share repurchase authorization remaining.

Dividend Update

The company paid cash dividends worth $58 million to its stockholders in the fourth quarter. During 2017, total amount of dividends paid was $220 million.

In Nov 17, the company declared a cash dividend of 40 cents per share that was paid on Jan 26, 2018 to the shareholders of record on Dec 29, 2017.

2018 Guidance

Humana expects 2018 adjusted EPS to lie between $13.50 and $14.00

Total revenues are expected be $55.8-$56.4 billion.

Cash flow from operations is expected to range within $2.2 billion to $2.6 billion.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. There have been four revisions higher for the current quarter compared to three lower.

Humana Inc. Price and Consensus

Humana Inc. Price and Consensus | Humana Inc. Quote

VGM Scores

At this time, HUM has a poor Growth Score of F, however its Momentum is doing a lot better with a C. Following the exact same course, the stock was also allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Zacks' style scores indicate that the company's stock is suitable for value and momentum investors.

Outlook

Estimates have been broadly trending upward for the stock and the magnitude of these revisions looks promising. It comes with little surprise HUM has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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