Here's Why You Should Bet on Humana (HUM) Stock Right Now

Louisville-based Humana Inc. HUM is one of the largest health care plan providers in the United States. The company has been an investor favorite, given its strong fundamentals. Consistent generation of sufficient cash flows enabled the company to indulge in significant share buyback that has helped its bottomline. Also regular dividend payments have contributed toward creating shareholders’ wealth. Cash flows from operations totaled $1.1 billion in first-quarter 2017, up almost 100% over the prior-year quarter. The rise was primarily driven by the receipt of the merger termination fees, net of related expenses and higher earnings. This was partially offset by working capital changes.

Quarter to date, Humana’s stock has gained 13.3% compared with an 11.6% rally of the Zacks categorized Health Maintenance Organization (HMO) industry.

Humana’s strong underwriting results have also added to shareholders’ confidence in the stock. In the first quarter, Humana’s earnings per share (EPS) of $2.75 not only surpassed the Zacks Consensus Estimate but also improved 38% year over year due to the receipt of the break up fee from the terminated merger with Aetna Inc. AET. The company now expects adjusted EPS to be at least $11.10 in 2017, up from the previously guided range of $10.80–$11.00.

The company’s consistent growth in revenues since 2002 is also a major positive. In fact, the company’s revenues witnessed a compound annual growth rate (CAGR) of 16% over the last 11 years. During first-quarter 2017, adjusted consolidated revenues of $13.48 billion grew 4% on higher Retail segment revenues from the company’s Medicare business. For 2017, the company expects total revenue in the range of $53.5 billion to $54.5 billion.

Humana also continues to grow on the back of its strong Medicaid business which recorded a CAGR (2011–2016) of 6.6% in its medical membership. During the first quarter of the year, Individual Medicare Advantage and Group Medicare Advantage membership grew 1% and 23%, respectively, year over year, whereas standalone PDP membership rose 8%.

The Zacks Consensus Estimate has witnessed upward revision for both 2017 and 2018. The 2017 estimates have increased 2% and estimates for 2018  have grown 1.7% over the last 60 days. The stock also looks undervalued compared to its peers as its price to cash flow ratio of 5.25 is pegged lower than the industry average of 6.24.

Zacks Rank & Key Picks

Humana presently has a Zacks Rank #2 (Buy). A couple of other stocks that warrant a look include Align Technology, Inc. ALGN and Inogen Inc. INGN. Both the stocks sport a Zacks Rank #1(Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Align Technology, a medical dental supplies company, topped estimates in each of the last four quarters with an average beat of 59.23%.

Inogen is a medical instruments seller, which delivered positive surprises in each of the last four quarters with an average beat of 82.42%.

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