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Why You Should Hold Humana (HUM) Stock in Your Portfolio

Zacks Equity Research

Humana Inc. HUM is well-poised for growth on the back of its robust Medicare business and strategic initiatives.

The company has an impressive Growth Score of A and this style score analyzes its growth prospects.

It flaunts a commendable earnings surprise history, having exceeded the Zacks Consensus Estimate in the trailing 12 quarters, the average being 5.05%. The stellar surprise record underlines the company’s operating excellence. It expects 2019 adjusted EPS in the range of $17.25- $17.5, up from the earlier expectation of $17-$17.5. Individual Medicare Advantage membership is now predicted in the band of 415,000- 440,000, up from the preceding range of 375,000-400,000. This strong guidance instills investor confidence in the stock.

The company’s return on tangible equity — a profitability measure — stands at 33.1% against its industry's negative 120.6%.

Humana’s Medicare business has been delivering encouraging results over the last several quarters on the back of solid operating initiatives. Strength in Medicare Advantage performance led to a better 2018 Retail segment benefit ratio, evident from higher Medicare membership, which shot up by 54% from 2013 to 2018. In the first quarter of 2019, Individual Medicare membership rose 13.7% year over year. The company expects sturdy individual Medicare Advantage membership growth in 2019 and raised its guidance to a range of 415,000-440,000 members, up from the prior estimate of 375,000-400,000.

The company has also been making concerted efforts in executing strategic buyouts to fuel its business growth. Certain buyouts, such as Family Physicians Group, Your Home Advantage, Curo and a share in Kindred at Home poise the company well for growth.

Humana has been prudently deploying excess capital for the past several years that consistently impresses investors. While it has been hiking its dividend since 2011, last November, the company inked a deal to affect a $750-million ASR program under its current share repurchase authorization. We believe that this financial strength will continue to boost investor optimism on the stock.

However, Humana has been persistently witnessing a rise in operating expenses since 2010. Although the same declined to some extent in 2017, the metric again rose in 2018 and during the first quarter of 2019 as well. The company expects to further witness an elevation in benefit expenses, which will induce overall higher operating expenses. Rising expenses are also likely to hurt the bottom line.

The company is well-placed for growth, evident from its favorable VGM Score of A. Here V stands for Value, G for Growth and M for Momentum with the score being a weighted combination of all three factors.

The long-term earnings growth rate is expected at 13.9%, above the industry’s average of 13.6%, which is an upside for the company.

The Zacks Consensus Estimate for the company’s current-year earnings is pegged at $17.57, indicating an increase of 20.8% from the year-ago reported figure on revenues of $63.8 billion, which again implies a 12% rise from the prior-year reported number.

For 2020, the Zacks Consensus Estimate for earnings stands at $18.96 on $69.2 billion revenues, suggesting a respective 7.9% and 8.6% improvement from the year-earlier reported figures.

Shares of this Zacks Rank #3 (Hold) company have lost 15.9% in a year's time, wider than its industry’s decline of 2.4%.


Stocks to Consider

Investors interested in the medical sector can take a look at some better-ranked stocks like The Joint Corp. JYNT, Molina Healthcare, Inc MOH and WellCare Health Plans, Inc. WCG. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Joint Corp. develops, owns, operates, supports and manages chiropractic clinics. In the last four quarters, the company delivered average beat of 190%. It sports a Zacks Rank #1 (Strong Buy).

Molina offers Medicaid-related solutions to meet the health care needs of low-income families and individuals. It carries a Zacks Rank #2 (Buy). In the trailing four quarters, the company came up with average beat of 88.17%.

WellCare Health offers managed care services to government-sponsored health care programs. The company pulled off average positive surprise of 13.52% in the preceding four quarters. It has a Zacks Rank of 2.

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