Strong quarterly results for health insurer Humana deserve a bigger rally in its shares

Published Wed, Apr 27 20221:34 PM EDT

Humana (HUM) reported a better-than-expected first quarter Wednesday morning. Revenue increased 16% year-over-year to $23.97 billion, topping estimates on FactSet of $23.54 billion, and adjusted earnings per share increased 5% year-over-year to $8.04, exceeding estimates of $6.80. Driving the big earnings beat was lower-than-anticipated administrative costs (some of this is timing) and outperformance in the pharmacy business. Humana's benefits expense ratio — also known as medical loss ratio, or MLR — was 86.4% and a tick lower (a good thing) than consensus estimates of 86.5%. Bottom line This was a great quarter from Humana — and quite frankly, we are surprised that the stock is not up even more Wednesday. Humana shares were up nearly 3.5% in afternoon trading. In an earnings season when many management teams are expected to be cautious due to lockdowns in China and the ongoing war in Europe, we think investors will come to appreciate a consistent, low double-digit-percent earnings-per-share grower like Humana, which gets all its revenues from the United States. We reiterate our 1 rating , and we are looking to add to our position. Segment results for Q1 Humana's retail segment includes Medicare benefits, marketed to individuals directly or via group Medicare accounts, Medicare Supplement and state-based contract accounts. Revenue from this segment increased 14% year over year to $21.35 billion, driven by individual Medicare Advantage, membership growth in state-based contracts, and higher per member individual Medicare Advantage premiums. The benefits expense ratio in the quarter was 88%, representing a 30 basis point increase from last year, largely due to the anticipated lower favorable Prior Period development . Excluding the impact of favorable PPD (so think "core"), retail's benefit ratio decreased (improved) 70 basis points year over year to 89.5% from 90.2%. Importantly, management said on the call that the results from its open enrollment period trended slightly better than previous expectations. If those trends continue through the rest of the year, management expects to see its individual Medicare Advantage growth to be slightly above the midpoint of its current guidance range of 150,000 to 200,000. While our thesis is based on the idea that Humana will accelerate MA growth in 2023 through better execution with investment support from its cost savings plan, we are encouraged the business has started to trend back in the right direction following the growth cut earlier this year. Humana's group and specialty segment mostly consists of employer group fully insured commercial medical products and specialty insurance benefits marketed to individuals and groups. Revenue from this segment decreased 7% year over year to $1.613 billion, primarily due to the anticipated decline in fully insured commercial medical and ASO commercial memberships, partially offset by higher per member premiums. The benefits expense ratio in the quarter was in line with last year at 74.7%. Excluding the impact of favorable PPD, the benefit ratio would have been 77% vs. 80.7% last year. Healthcare services segment includes pharmacy, provider, and home services along with other services and capabilities to promote wellness. Revenue from this segment increased 21% year over year to $1.49 billion and was driven by the impact of Kindred at Home revenues, strong individual MA and state-based contracts membership growth (which led to higher pharmacy revenues), greater mail-order pharmacy penetration by retained members, and higher revenues associated with growth in Humana's provider business. The segment's operating cost ratio, which is simply a percentage of operating costs as a percent of total revenues less investment income, was 94.2%, down from 96% last year due to the consolidation of Kindred at Home operations, which has a lower operating cost ratio than the other businesses within the segment. The company's pharmacy operations had a favorable impact on the ratio as well. Raised outlook Management updated guidance for the full year 2022. Thanks to the strong start to the year, management raised its adjusted earnings per share outlook to approximately $24.50, a 50-cent increase from its previous view of "at least $24" and higher than estimates of $24.15. This guidance continues to include a $1 Covid headwind and the estimated dilutive impact from the pending divesture of its 60% ownership of Kindred at Home's hospice and personal care divisions that was announced last week. While some may question why management did not pass through the entirety of its first quarter earnings beat to the updated full year outlook, we think this is just management being conservative. It is not their style to raise guidance this early in the year due to the quarter-to-quarter variability of medical cost trends. $1 billion value creation plan All signs point to management's $1 billion value creation plan being on track. As a reminder, management is expected to use these savings to fund growth and invest in their Medicare Advantage business by offering more benefits at competitive pricing. During the conference call, management highlighted that initiatives valued at $575 million "are now in the design and execute phase." Capital allocation Humana repurchased 2,431,200 shares in the quarter at an average price of $411.32. The company currently has $2 billion remaining under its authorization. Management plans to use the $2.8 billion in proceeds from the Kindred divestiture to pay down debt. (Jim Cramer's Charitable Trust is long HUM. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Bruce Broussard, CEO, Humana

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