Humana Looking Healthier

Apr.27.09 | About: Humana Inc. (HUM)

“More importantly, guidance for the full year is better than the prior guidance. That’s the important thing for them. Humana is up 8%. Very good news from them. Overall, lower prescription drug claims and medicare premiums were up. That’s good news for them. That stock is opening to the upside.” CNBC’s Squawk on the Street 4/27/2009

Humana (NYSE:HUM) reported quarterly earnings on Monday morning that got a nice gain from their government sponsored plans. There has been so much attention paid to health today with everyone worried about the swine flu that it only seemed fitting to concentrate on the healthcare sector. Humana reported earnings of $1.22 per share beating estimates by a nickel, and previous quarterly profit was more than double the company’s profit from a year ago. Sales were also better than expected, as gains from government sponsored Medicare Advantage plans more than made up for the drop off in commercial enrollment of nearly 150,000. Ockham historical valuation HUM

While the last quarter was pretty good, perhaps most impressively Humana raised guidance for the second quarter and the full year. Shares are rose in morning trading more than 7%. We at Ockham have viewed Humana as Undervalued for some time now, as the fundamentals seem to easily support the now much lower price levels. The current price-to-sales and price-to-cash flow metrics for Humana are well below the historically normal range. In addition to this, healthcare stocks after taking quite a hit recently are ranked as the most attractive sector for valuations.

However, our optimism is tempered a bit by the fact that Humana has become so dependent on the Medicare programs, funding to which many expect to fall off in the next year. Even though this was a strength in the last quarter, it could very easily hurt the bottom line going forward.

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