Humana: A Defensive Play With Large Growth Potential

| About: Humana Inc. (HUM)

By Jason Jenkins

If you thought the United States government was dysfunctional and inept in 2011… “you ain’t seen nothin’ yet.”

Let’s see, we saw one rating agency strip the United States of its AAA credit rating and the mind-blowing ineffectiveness of the deficit-cutting Supercommittee.

Now it’s 2012. Republicans and Democrats head into a presidential election year with hardened tax-and-spending battle lines that reek of class warfare. The trenches have been dug and as with any war of attrition, expect little progress from either side.

Most market analysts don’t expect either party to deviate from the script they’ve been reading from for much of next year. So, in conjunction with the European sovereign debt crisis, geo-political instability in the United States and the European Union will likely keep markets volatile.

Defense! Defense!

Defensive plays in this market are the “inside-the-box” strategies that are likely to provide sufficient cushion in the current period of extreme skepticism. The traditional defensive market sectors that are particularly attractive include consumer staples, utilities and health care stocks.

Given the approach, The Street ranks Humana (NYSE: HUM) as its sixth best stock of 2011 and one of its top nine defensive plays for 2012.

The Numbers…

Humana offers an array of health, pharmacy and supplemental benefit products through its medical centers and worksite medical facilities. The services offer target employer groups, government benefit programs, individuals, as well as primary and workplace care.

Net income for the third quarter of this year was reported at $444.8 million, or $2.67 per diluted share, compared to $393.2 million, or $2.32 per diluted share, in the year-ago quarter. Total revenue increased 11.4 percent year-over-year to $9.3 billion. For 3Q, revenue from premiums and services soared 13 percent, led by a 10-percent increase in average Medicare Advantage membership.

Humana is one of the largest providers of Medicare Advantage plans, privately run versions of the government’s Medicare program. Medicare accounts for 64 percent of Humana’s revenue.

Health insurers entered this year uncertain about the impact of a new healthcare overhaul rule governing medical-loss ratios, which essentially measure the percentage of premiums insurers spend on care. The impact of that rule on the business has turned out to be minimal, and insurers face no such uncertainties heading into next year.

Humana has a current dividend yield of 0.6 percent and a net income Compound Annual Growth Rate (OTCPK:CAGR) of 29.9 percent, based on Bloomberg data. In the past three months, the company accumulated 15.5 percent as compared to the S&P 500′s 6.4-percent gain. The company has announced a dividend of $0.25 payable January 31, 2012 to shareholders of record December 30, 2011.

2012 and Beyond

Of the 22 analysts covering the stock, 68 percent recommend it as a “Buy” and the rest rate it a “Hold.” There are no sell ratings on the stock. On average, analysts estimate 12.6 percent upside to $97.57 in value from current levels.

Humana has stated that it expects 2012 earnings of $7.40 to $7.60 a share. Many analysts expected an initial forecast from the company of $7 a share or less, a Citigroup analyst, Carl McDonald, said in a research note.

Health insurers have been helped the last several quarters by medical costs that have grown more slowly than expected. If that trend continues, the analyst said Humana earnings could top $9 a share next year.

A defensive stock with great growth potential looks like a great play in this these times.

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