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Humana (HUM) Down 10.2% Since Last Earnings Report: Can It Rebound?

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Zacks Equity Research
·5 min read
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It has been about a month since the last earnings report for Humana (HUM). Shares have lost about 10.2% in that time frame, underperforming the S&P 500.

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

Humana's Q3 Earnings Surpass Estimates, Decline Y/Y

Humana’s third-quarter 2020 operating earnings per share of $3.08 beat the Zacks Consensus Estimate of $2.86 by 7.7% on the back of improved revenues. However, the same plunged 38.8% year over year due to COVID-19 testing and treatment costs.

Operational Update

Revenues of $20.08 billion were up nearly 24% year over year. Moreover, the top line surpassed the Zacks Consensus Estimate by 7.5% on the back of better premium revenues from Medicare Advantage along with improved membership in state-based contracts and an increase in per member Medicare Advantage premiums. Other factors, such as higher investment income also contributed to this upside. Benefit ratio contracted 240 basis points (bps) to 82.6%. Operating cost ratio expanded 180 bps to 13.2%. Total expenses shot up 18.7% year over year due to higher benefits and operating costs.

Segmental Results

Retail

Revenues from the Retail segment were $16.74 billion, up 19% year over year. This can primarily be attributed to premium rise owing to Medicare Advantage along with state-based contracts membership growth and higher per member Medicare Advantage premiums. Benefit ratio of 85.1% contracted 80 bps year over year on temporary deferral of non-essential care along with reinstatement of the non-deductible health insurance industry fee in 2020.

The segment’s operating cost ratio of 11.2% expanded 190 bps year over year due to reinstatement of the non-deductible health insurance industry fee in 2020 along with COVID-19-related costs.

Group and Specialty

Revenues from the Group and Specialty segment were $1.79 billion, down 5% from the prior-year quarter due to reduction in fully-insured group commercial membership. Benefit ratio expanded 670 bps year over year to 93% due to expenses involving the ongoing pandemic relief efforts along with COVID-19 testing and treatment costs for fully-insured commercial group medical members
Operating cost ratio expanded 330 bps year over year to 25.2%.

Healthcare Services

Revenues of $7.13 billion increased 8% year over year, primarily owing to Medicare Advantage membership growth and additional pharmacy revenues associated with the Enclara Healthcare buyout. Operating cost ratio expanded 20 bps year over year to 96.4% due to coronavirus-related administrative costs as well as expenses incurred in the pharmacy business for timely delivery of prescriptions.

Financial Update

As of Sep 30, 2020, the company had cash and cash equivalents, and investment securities of $20.7 billion, up 37.9% from the level at 2019 end.
Debt-to-total capitalization as of Sep 30, 2020 was 33%, expanding 100 bps from the level as of Dec 31, 2019.

In the September quarter, cash flows provided by operating activities came in at $1.8 billion, down 25.7% year over year.

Capital Deployment

The company did not complete any open-market transaction in the quarter under review. It paid out cash dividends worth $74 million in the period. Its board of directors also announced a cash dividend of 62.5 cents per share, payable Jan 29, 2021 to its shareholders of record on Dec 31, 2020.

2020 Guidance

After announcing third-quarter results, the company updated its 2020 guidance. Adjusted EPS is expected in the range of $18.50-$18.75, narrowed from the previous outlook of $18.25-$18.75. The full-year individual Medicare Advantage membership is now anticipated to be around 375,000 members, up from the previous range of 330,000-360,000 members. Humana reiterated its expectations for group Medicare Advantage net membership gains. It expects a year-over-year increase of 90,000 members in 2020. For its stand-alone PDP business, it still anticipates a membership decline of 550,000.
 

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted -72.61% due to these changes.

VGM Scores

At this time, Humana has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

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

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Humana has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.


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