Will Humana (HUM) Grow In Spite Of Segmental Weakness?

On May 18, 2016, we issued an updated research report on Humana Inc. (NYSE:HUM) .

Humana’s first-quarter 2016 earnings surpassed the Zacks Consensus Estimate but declined year over year due to lower operating results at the Retail segment. However, slightly better operating results in the Group and Healthcare Services segments partially offset the downside.

Humana is set to be acquired by Aetna Inc. (NYSE:AET) to form a combined company by the second half of 2016. The combination of the two healthcare industry majors will create the second-largest managed care company in the U.S. Moreover, the company remains optimistic about this transaction as the deal is expected to further enhance the high-quality healthcare experience of its members.

Moreover, Humana’s Medicare business, which covers Medicare Advantage and Medicare Part D Prescription Drug Plan (PDP) contracts with the federal government, accounts for the majority of its premiums and services revenues. The company remains optimistic about the consistent performance of this business and expects PDP net membership growth of 300,000–330,000 in 2016.

Further, the company has maintained a strong cash and short-term investment position over the past several years, while efficiently deploying excess capital. However, the company suspended its share repurchase program on Jul 2, 2015 owing to its pending acquisition by Aetna. Presently, the company has $1.04 billion remaining under its authorization.

In addition, the company has been able to retain the confidence of the ratings agencies on the back of solid earnings as well as strong capitalization.

However, Humana continues to face weakness in its Group Medicare Advantage Business. Also, the company’s Individual commercial membership business displayed persistent underperformance. Moreover, the company’s outlook for this business in the near term is dismal.

Stocks to Consider

Currently Humana carries a Zacks Rank #3 (Hold). Some better-ranked stocks are Magellan Health, Inc. (NASDAQ:MGLN) and UnitedHealth Group Incorporated (NYSE:UNH) . Both of these stocks hold a Zacks Rank #2 (Buy).

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