It has been about a month since the last earnings report for Humana (HUM). Shares have lost about 2.6% 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 drivers.
Humana Q3 Earnings Beat on Strong Individual MA Unit
Humana reported third-quarter 2022 adjusted earnings per share (EPS) of $6.88, beating the Zacks Consensus Estimate by 10.1%. The bottom line soared 42.4% year over year. Our estimate for the metric stands at $6.20 per share.
Strong contribution from HUM’s Retail and Healthcare Services segments contributed to the strong quarterly results. However, its margins were partly hurt by escalating operating costs.
Humana’s revenues improved 10.2% year over year to $22,799 million owing to membership growth in its individual Medicare Advantage business and customer wins from state-based contracts. Improved per member individual Medicare Advantage premiums also contributed to revenue growth. Yet, the top line fell short of the consensus mark by a whisker.
Total premiums of Humana amounted to $21,468 million, which grew 8% year over year in the quarter under review. The figure lagged the Zacks Consensus Estimate of $21,510 million but beat our estimate of $21,450.4 million.
Revenues from services climbed 37.2% year over year to $1,159 million. Investment income of $172 million compared favorably against the prior-year quarter’s investment loss of $33 million.
The benefits expense ratio of 85.6% improved 150 basis points (bps) year over year in the third quarter. The operating cost ratio deteriorated 90 bps year over year to 13.5% on account of the consolidation of Kindred at Home operations and the net impact of charges resulting from Humana’s initiatives as part of its previously disclosed $1 billion value creation plan.
Total operating expenses increased 7.8% year over year to $21,627 million, primarily due to higher benefits, operating costs, and depreciation and amortization. Our estimate for the metric suggests a 7.1% increase from the year-ago quarter’s reported figure.
Net income of $1,193 million dropped 22.1% year over year in the quarter under review.
The segment’s revenues of $20,189 million rose 9.5% year over year on the back of individual Medicare Advantage and state-based contracts membership growth, and increased per member individual Medicare Advantage premiums. Our estimate for the metric stands at $20,192.1 million.
Adjusted earnings of $750 million surged 63% year over year in the third quarter. The benefits expense ratio came in at 86.5%, which improved 160 bps year over year. The operating cost ratio of 9.4% deteriorated 30 bps year over year due to elevated marketing expenses incurred this year to boost individual Medicare Advantage growth.
Total medical membership of the segment increased 2.8% year over year as of Sep 30, 2022.
Group and Specialty
The segment recorded revenues of $1,551 million, which fell 8.5% year over year due to reduced fully-insured commercial medical and ASO commercial membership. The figure came higher than our estimate of $1,529.1 million.
Adjusted earnings came in at $50 million during the third quarter, while a loss of $27 million reported in the prior-year quarter.
The benefits expense ratio of 78.7% improved 770 bps year over year. The operating cost ratio deteriorated 270 bps year over year to 27.6% due to the membership fall at a higher rate than the decrease in absolute administrative costs and investments made in the Military services business.
The segment’s revenues of $8,880 million grew 10.5% year over year in the third quarter, thanks to higher pharmacy revenues derived from individual Medicare Advantage and state-based contracts membership growth. Better mail-order pharmacy penetration and a strong provider business also contributed to the segment’s results. Our estimate for the metric stands at $8,992 million.
Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) increased 8.9% year over year to $452 million.
The operating cost ratio was flat year over year at 95%.
Financial Update (as of Sep 30, 2022)
Humana exited the third quarter with cash and cash equivalents of $13,558 million, which increased to nearly four-fold from the 2021-end level. Total assets of $50.8 billion increased 14.4% from the figure at the 2021 end.
HUM’s long-term debt of $7,798 million declined 26% from the figure as of Dec 31, 2021. It had short-term debt of $2,799 million. Debt to total capitalization came in at 39.4%, which improved 360 bps year over year.
Total stockholders’ equity of $16,317 million inched up 1.3% from the level at 2021 end.
Operating cash flows amounted to $8,453 million in the third quarter, which increased to nearly three-fold year over year.
During the third quarter, Humana bought back shares worth $4 million. As of Nov 1, 2022, it had $2 billion left under the repurchase authorization. In the same time frame, HUM paid out dividends of $100 million to its shareholders.
On Humana’s Investor Day held in September 2022, management hiked its 2022 adjusted EPS guidance. Concurrent with third-quarter results, HUM maintained its view and continues expecting adjusted EPS at around $25 (suggesting 21% growth from the reported figure of 2021).
Revenues for this year are still anticipated within $91.6-$93.2 billion.
Revenues from the Retail segment are continued to be expected within $81.7-$82.4 billion, while the Group and Specialty segment’s revenues are still projected between $6 billion and $6.5 billion. Revenues from the Healthcare Services segment are continued to be estimated in the range of $35.4-$35.9 billion.
HUM continues to expect individual Medicare Advantage membership to grow by 150,000-200,000 members during 2022. Management still anticipates Group Medicare Advantage membership to be flat year over year. Medicare stand-alone prescription drug plan is likely to decline by 80,000 members, better than the earlier projection of a decrease of 100,000 members.
The benefit ratio from the Retail segment is still estimated at 86.6-87.6%, while the same for the Group and Specialty segment is continued to be expected at 78.3-78.8%. The consolidated operating cost ratio is still expected at 13.3-14.3%.
Management continues to estimate cash flow from operations within $3-$3.5 billion. Capital expenditures are still forecast at around $1.3 billion.
2023 Guidance Issued for Membership
Management forecasts individual Medicare Advantage membership to witness an increase in the range of 325,000-400,000. The outlook indicates a 7.1-8.7% improvement from the earlier expected membership as of Dec 31, 2022.
How Have Estimates Been Moving Since Then?
It turns out, estimates revision have trended downward during the past month.
The consensus estimate has shifted -27.42% due to these changes.
Currently, Humana has a strong Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. Charting a somewhat similar path, 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.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Humana has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
Performance of an Industry Player
Humana is part of the Zacks Medical - HMOs industry. Over the past month, Centene (CNC), a stock from the same industry, has gained 0.9%. The company reported its results for the quarter ended September 2022 more than a month ago.
Centene reported revenues of $35.87 billion in the last reported quarter, representing a year-over-year change of +10.7%. EPS of $1.30 for the same period compares with $1.26 a year ago.
Centene is expected to post earnings of $0.87 per share for the current quarter, representing a year-over-year change of -13.9%. Over the last 30 days, the Zacks Consensus Estimate has changed -1.1%.
Centene has a Zacks Rank #3 (Hold) based on the overall direction and magnitude of estimate revisions. Additionally, the stock has a VGM Score of A.
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