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- Strong performance of Humana is a key measure of Medicare.
- The largest ever deal in the insurance industry.
- High stakes for the federal government because of Humana’s key role in Medicare.
Humana Inc. (HUM, Financial) performs strongly in a key measure of Medicare quality known as star ratings, which are tied to government payments and has been moving rapidly to forge close ties with doctors and other providers in efforts to boost performance and rein in costs. Humana also is a leading provider of Medicare drug benefits, known as Part D plans, with 18% of that market.
In recent months, it also had some operational snags; Humana has missed analysts’ earnings projections for the past three quarters. It has warned of a possible uptick in hospital utilization among its Medicare members, and it has disclosed a Justice Department probe into how Medicare Advantage insurers score the health risks of their members, which impacts their payments.
The company signed a deal with Aetna Inc. (AET, Financial) for about $37 billion in cash, which is the largest ever deal in the insurance industry. The transaction is an outstanding outcome for its shareholders, who will receive an immediate premium and the opportunity to participate in the growth potential of the combined organization. Also the transaction projected to realize $1.25 billion in annual synergies in 2018. Humana’s chronic-care capabilities that measurably improve health outcomes for larger populations will also enable the company to better compete with more cost effective products.
Humana reported strong FQ1 results with adjusted earnings up 5% from the first quarter of last year with a strong pretax income of $744 million which reflects a year-over-year increase of over 8% primarily due to improved year-over-year results in each of the Company's business segments. Adjusted EPS reported a growth rate of approximately 17%.
They also experienced another successful Medicare enrollment season for 2015 Individual Medicare Advantage membership at March 31, 2015, that was up 11% versus the end of the fourth quarter 2014, up 14% year-over-year.
Bottom line
The Medicare business is seen as a growth engine for the industry, and Humana has largely focused on a fast-growing business part of the health insurance, medicare advantage, that totals 3.2 million and that would give the merged company the biggest market share in the program, ahead of current leader UnitedHealth.
In 2014 Human was the third-biggest health insurer in the U.S. with 48.5 B of revenue and just in May 2015 it was the second-largest company.
The company’s 2015 EPS estimate reflects expected strong growth and operating efficiencies in the company’s Medicare offerings, a year-over-year improvement in the Healthcare Services businesses, a break-even results in its Humana one business and reduced investment spending in state-based contracts, partially offset by the tax implications of the expected increase in the non-deductible health insurance industry fee.
Human's share price appears significantly overpriced according to Gurufocus' DCF calculator and its current share price offers a margin of safety of -3%. This overprice is confirmed even by the Peter Lynch earnings line that gives a value of $189.9.
Also PEG multiple takes into account the expected long term growth in earnings of the company, a stock with a PEG between 0 and 1 is usually considered to be underpriced, between 1 and 2 to be at fair value and over 2 to be overpriced. Based on the PEG ratio of HUM being 2.89, we consider Humana Inc. to be overpriced. So all these mean that value buyers who do not currently hold HUM should not consider buying and investors currently holding the stock should consider selling.
About Humana
Humana Inc., headquartered in Louisville, Ky., is a leading health and well-being company focused on making it easy for people to achieve their best health with clinical excellence through coordinated care. The company’s strategy integrates care delivery, the member experience, and clinical and consumer insights to encourage engagement, behavior change, proactive clinical outreach and wellness for the millions of people we serve across the country.
