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Why Is Humana (HUM) Down 1.5% Since Last Earnings Report?

·7 min read

A month has gone by since the last earnings report for Humana (HUM). Shares have lost about 1.5% in that time frame, outperforming 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 Q1 Earnings Beat on Solid Healthcare Services

Humana’s first-quarter 2022 adjusted earnings per share of $8.04 surpassed the Zacks Consensus Estimate of $6.83. The bottom line also improved from the year-ago figure of $7.67 per share. The strong first-quarter earnings were supported by membership growth and higher premiums. Solid contribution from its Healthcare Services segment and pharmacy business supported the bottom line.

Revenues of $23,970 million were up from $20,668 million in the prior-year quarter, thanks to individual Medicare Advantage and state-based contracts membership growth plus higher per member individual Medicare Advantage premiums and the impact of Kindred at Home revenues from external customers. Also, the top line beat the Zacks Consensus Estimate of $23,550 million.

Operational Update

While revenues from premiums and services increased 12.8% and 171.2% year over year, respectively, investment income declined 96.2%.

Benefit ratio increased 50 basis points (bps) to 86.4% for the first quarter. Operating cost ratio increased to 12% from 9.7% a year ago, primarily due to consolidation of Kindred at Home operations.

Total operating expenses shot up 16.6% year over year to $22,681 million on higher benefits, operating costs, and depreciation and amortization costs, partially offset by lower administrative costs.

The company’s net income of $930 million increased from the year-ago level of $828 million.

Segmental Results

Retail

Revenues of $21,351 million were up from $18,648 million a year ago. This can be primarily attributed to a premium rise owing to individual Medicare Advantage along with state-based contracts membership growth and higher per member Medicare Advantage premiums. Adjusted earnings were recorded at $788 million, down from $798 million a year ago.

Benefit ratio of 88% expanded from 87.7% in the prior-year quarter due to a lower level of favorable prior period development. The segment’s operating cost ratio of 8% increased 20 bps year over year owing to marketing expenses incurred to support the growth of individual Medicare Advantage membership and strategic investments in technologies.

Group and Specialty

Revenues from this segment were $1,613 million, down from the prior-year quarter’s $1,737 million due to lower fully-insured commercial membership. Adjusted earnings were recorded at $133 million, down from $175 million a year ago.

Benefit ratio remained flat at 74.7%. While the lower level of favorable prior period development adversely impacted the ratio, it was partially offset by pricing and benefit design efforts to address COVID-19 impacts. Operating cost ratio increased 280 bps year over year to 25.7% due to declining membership at a higher rate than the decrease in administrative costs and increasing administrative costs.

Healthcare Services

Revenues of $8,688 million increased from $7,198 million a year ago, primarily owing to individual Medicare Advantage membership growth and state-based contracts membership growth, the impact of Kindred at Home along with higher revenues related to the company’s provider business. Adjusted EBITDA were recorded at $499 million, up from $329 million a year ago.

Operating cost ratio decreased 180 bps year over year to 94.2%. This was owing to the impact of consolidated Kindred at Home operations and operational improvement in its pharmacy operations.

Financial Update (as of Mar 31, 2022)

HUM had cash and cash equivalents of $4,864 million, up from $3,394 million at 2021-end. Long-term debt of $11,285 million jumped from $10,541 million at 2021-end. It had a short -term debt of $1,690 million. Debt to total capitalization was 45.8%, expanding 210 bps from the level of Dec 31, 2021.

Net operating cash flows came in at $302 million, comparing favorably with the year-ago cash used in operations of $837 million.

Capital Deployment

In January, Humana inked two separate deals with two third-party financial institutions to effect an aggregate $1-billion ASR program under its authorization. In the first quarter, the company bought back around 2.4 million shares. As of Apr 26, it had $2 billion remaining under the repurchase authorization.

2022 Guidance
The company increased its 2022 earnings guidance. Adjusted EPS is expected to be $24.50, up from the previous estimate of $24, pointing to an increase from the 2021 level of $20.64.

Other Projections

Earlier, Humana provided projections for 2022 revenues within $91.6-$93.2 billion, which indicates an improvement from $83.1 billion in 2021. Revenues from Retail, Group and Specialty, and Healthcare Services segments are expected at $81.2-$82.2 billion, $6.2-$6.7 billion, and $35.8-$36.3 billion, respectively.

For the full year, HUM still expects individual Medicare Advantage membership to grow by 150,000-200,000 members. While the company expects Group Medicare Advantage membership to remain flat year over year, Medicare stand-alone prescription drug plan is likely to decline by 100,000 members, up from the previous guidance of 125,000 members.

Benefit ratio from the Retail segment is still estimated at 86.6-87.6%, indicating a decline from 87.9% in 2021. The same from the Group and Specialty segment is expected at 78.3-78.8%, suggesting a significant decline from 82.5% in 2021.
    
Cash flow from operations is still expected within $3-$3.5 billion, implying growth from $2.3 billion in 2021. Full-year capital expenditure is expected at $1.3 billion.

 

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended upward during the past month.

The consensus estimate has shifted 8.39% due to these changes.

VGM Scores

Currently, Humana has a subpar Growth Score of D, a grade with the same score on the momentum front. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

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

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. 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 belongs to the Zacks Medical - HMOs industry. Another stock from the same industry, Centene (CNC), has gained 0.4% over the past month. More than a month has passed since the company reported results for the quarter ended March 2022.

Centene reported revenues of $37.19 billion in the last reported quarter, representing a year-over-year change of +24%. EPS of $1.83 for the same period compares with $1.63 a year ago.

Centene is expected to post earnings of $1.51 per share for the current quarter, representing a year-over-year change of +20.8%. Over the last 30 days, the Zacks Consensus Estimate has changed +4.2%.

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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