Humana (HUM) Awaits Buyout by Aetna; Highs Costs a Drag
We issued an updated research report on Humana, Inc. HUM on Dec 23, 2015.
Humana is set to be acquired by Aetna to form a combined company by the second half of 2016. On closing of the acquisition, Aetna Inc. AET will own 74% of the combined entity, while Humana will hold the remaining 26%.
In terms of operating capacity, Humana has been witnessing an expansion in its network of PPO and HMO providers. This is on account of increased memberships in the company’s portfolio. Also, business expansion initiatives through the development of various commercial products and purchase of entities that complement Humana’s services should help it in generating more revenues.
Additionally, for better managing its costs and strengthening its operations, the company has engaged in a number of Accountable Care arrangements with important names in the healthcare space. The insurer also scores strongly with credit rating agencies.
However, Humana has been incurring higher-than-expected expenses over the last few years. This is on account of higher benefit expenses as well as depreciation and amortization costs. Humana needs to initiate cost management to avoid negative impact on its financial position and pressure on its cash flow.
Moreover, the overhang of litigations continues to have an adverse effect on the company’s financials. Government probe on certain aspects related to Medicare and Medicaid operations in the Florida region are definitely a matter of concern. Cash flows are also affected adversely by high capital expenditures. Furthermore, Humana is expected to bear the brunt of the anticipated increase in health insurance industry fee like most other insurers. This is definitely a headwind for the company’s earnings.
Humana currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks from the healthcare services space include Centene Corp. CNC and Molina Healthcare, Inc. MOH. Both stocks hold a Zacks Rank #2 (Buy).
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