Humana Upgraded on Strong Fourth Quarter

| About: Humana Inc. (HUM)

On the back of strong fourth quarter results, we recently upgraded Humana, Inc. (NYSE:HUM) to Outperform.

The company reported a strong fourth quarter on the heels of improved performance in its operations, lower commercial medical cost trends and surplus cash flow generation in 2010, which also resulted in share buybacks.

Results outshone the Zacks Consensus Estimate by 85 cents.

Humana recently completed the acquisition of Concentra Inc. for $790 million in cash on December 22, 2010. Consequently, Humana expects an increase in its consolidated revenue for 2011.

Concentra produces approximately $800 million of revenues annually from 240 workplace health-care facilities and more than 300 medical centers in 42 states. Moreover, the acquisition will provide access to Humana’s medical members in certain geographical areas.

With the closure of the acquisition of Concentra, Humana had raised its earnings per share guidance for 2011, and sees earnings per share in the range of $5.45–$5.65, from the previous outlook of $5.35–$5.55.

Additionally, Humana’s better-than-expected result was attributable to higher average Medicare Advantage membership, which also increased the revenues from premium and administrative services.

At the end of the fourth quarter, Humana's Medicare Advantage membership jumped nearly 16.8% from the prior-year quarter. However, the increase was partially offset by lower average medical membership in the stand-alone Prescription Drug Plan ((NASDAQ:PDP)) and commercial fully-insured group plans.

Looking forward, we believe that the Medicare Advantage and PDP membership growth estimates for 2011 are expected to increase on strong sales of 2010. Moreover, this also led to the increase in Humana’s 2011 outlook, coupled with the stand-alone Prescription Drug Plan (PDP) offerings during the recently completed 2011 open enrollment period.

Humana now anticipates EPS for the year ending December 31, 2011 (FY11) in the range of $5.70 to $5.90 versus its previous estimate of $5.45 to $5.65. This increase in FY11 EPS guidance primarily reflects better-than-expected sales for the company's Medicare Advantage and stand-alone PDP offerings during the recently completed 2011 open enrollment period as well as an increase in expected Commercial Segment earnings.

Further, with the launch of a Medicare Part D PDP in collaboration with Wal-Mart Stores Inc. (NYSE:WMT) on October 1, 2010, Humana will now be able to provide Medicare beneficiaries including seniors and disabled citizens to save more than $450 on average in 2011 on premiums, prescription medication co-payments and cost-shares than the drug plans in 2010.

Apart from this, Humana has surplus cash equivalents and investment securities, which have grown drastically by 18% year over year in 2007 and 26% in both 2008 and 2009, although growth moderated at 10.0% in 2010. The company has utilized its excess cash to repurchase shares or for other corporate purposes.

During 2010, Humana repurchased shares worth $100 million, leaving approximately $150 million that can be repurchased by the end of 2011. Going ahead, the strong cash position and capital leverage should help Humana to add to shareholders’ value and confidence in the stock.

Recently, the U.S. Department of Defense (DoD) has awarded its Tricare contract to Humana to administer health benefits to soldiers and their families in the 10-state South region. However, it was initially awarded to a division of Minnesota-based UnitedHealth Group Inc. (NYSE:UNH), but after continuous protests by Humana, DoD reviewed their decision and awarded the $23.5 billion 5-year contract to Humana on February 25, 2010.

As a result of winning the contract, management further upgraded its earnings guidance for 2011 to reflect the extinguishment of expenses of approximately $0.25 per share, which would have been otherwise incurred for the loss of contract in early 2012. Humana’s 2011 earnings guidance was further raised to $5.95 to $6.15 per share, from previous estimates of $5.70 to $5.90 per share.

The quantitative Zacks #1 Rank (short term Strong Buy rating) on the stock indicates strong upward pressure on the shares over the near term.

Headquartered in Louisville, Kentucky, Humana Inc. is one of the largest health care plan providers in the United States. Humana provides health insurance benefits under Health Maintenance Organization (HMO), Private Fee-For-Service (PFFS) and Preferred Provider Organization (PPO) plans. The company also provides other benefits with specialty products including dental, vision and other supplementary benefits.