Humana's High Expenses Raise Caution, Memberships Impress - Analyst Blog

We issued an updated research report on Humana Inc. HUM on May 20, 2015.

Last month, the company reported first-quarter 2015 earnings that missed the Zacks Consensus Estimate by 2.76%. Notably, the company has delivered negative earnings surprises in three of the last four quarter with a negative average miss of 4.19%.

Humana has been incurring higher-than-expected expenses owing to increases in operating, depreciation and amortization costs. Increased benefits have also led to deteriorating benefit ratios across most operating segments and the first quarter of 2015 was no exception. Humana needs to initiate cost management to avoid negative impact on its financial position and pressure on its cash flow. Higher expenses may affect the financials adversely in the long term due to capital erosion.

Humana operates in a highly competitive industry. The company is facing intense pricing pressure from competitors, particularly from Blue Cross Blue Shield. Moreover, the overhang of litigations continues to have an adverse effect on the company. Additionally, as mandated by the Health Care Reform Law, Humana has to pay health insurance industry fee which is expected to increase further in 2015. This is definitely a headwind for the company’s earnings.

Further capital expenditure for Humana has increased over the past few years. Higher expenses related to growth in the provider services and pharmacy businesses in Humana’s Healthcare Services segment compelled the company to raise the 2015 capital expenditure guidance from that in 2014.

Humana’s medical membership has been increasing for quite some time and the trend continued in the first quarter of 2015 as well. Moreover, the increased membership in the state-based Medicaid program, driven by the contracts for the Florida Medicaid business, and an expected increase in the stand-alone PDP membership is likely to drive overall membership further.   

Humana has been expanding its business platform over quite a few years. The company has developed various commercial products designed to provide choices to employers who are facing substantial premium increases due to medical cost inflation. Moreover, Humana has maintained a strong cash and short-term investment position over the past several years, while efficiently deploying excess capital. This is evident from the 3.6% dividend hike in Apr 2015, after a 3.7% increase in Apr 2014, 3.85% in Apr 2013 and 4% in Apr 2012. The company also scores strongly with the credit rating agencies.

Humana currently  carries a Zacks Rank #4 (Sell). Investors interested in the health maintenance space may consider better-ranked stocks like Anthem, Inc. ANTM, Molina Healthcare, Inc. MOH and Aetna Inc. AET. While Anthem and Molina Healthcare sport a Zacks Rank #1 (Strong Buy), Aetna holds a Zacks Rank #2 (Buy).

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