Humana closed one deal and announced another — what it means for this Club name

Published Fri, Aug 12 20223:00 PM EDTUpdated Fri, Aug 12 20223:04 PM EDT

Kevin Stankiewicz @in/kevinstankiewicz @kevin_stank

Club holding Humana (HUM) made two announcements this week that both fit into the managed care provider's long-term growth strategy. We're breaking them down here and providing an update on our investment outlook for Humana, which we started a position in earlier this year and has so far done well. 1. Hospice divestiture is finalized Humana on Thursday completed the divestiture of Kindred at Home's hospice and personal care divisions, about four months after the company detailed its plan to sell a majority stake to private equity firm Clayton, Dubilier & Rice. While Humana is maintaining minority ownership in the new standalone company, it plans to pay down debt with most of the roughly $2.8 billion in cash proceeds from the transaction. Doing so should bring Humana's total debt-to-capitalization ratio down into the low 40s, according to management, giving the company more flexibility to do larger M & A deals. Humana's target debt-to-capitalization ratio is around 35. However, it has been slightly above 45 at the conclusion of Humana's past three quarters, higher than where it's been in recent years because Humana took on debt to buy Kindred at Home. That deal closed in August 2021 . The divestiture represents another step forward in Humana's broader strategy around health-care services, particularly home health care. The decision to buy Kindred at Home was rooted in Humana's desire to establish a more national footprint in the area of home health, which is an increasingly popular way to deliver care to aging patients who are living on their own longer. However, organically building out a skilled workforce across the country to offer those services at scale would've been a considerable undertaking for Humana. That's why going the acquisition route made sense. Despite selling a majority stake in the hospice side of Kindred, Humana is holding onto the company's core home health operations and is in the process of folding those under its CenterWell brand. Humana launched the CenterWell name in March 2021 for all of its health-care services offerings. Keep in mind: While Humana is primarily seen as a health insurer, it makes money doing a lot more than that. Indeed, health-care services like pharmacy, primary care and home health now contributes around 40% of Humana's earnings, a fact many investors overlook when evaluating the company, Bank of America analysts argued in a note to clients earlier this summer. In a note to clients Thursday, those same BofA analysts raised their price target on HUM shares to $585 from $560, contending the company is undervalued and has ample levers like CenterWell to grow earnings in future years. 2. Medicaid services in Wisconsin to grow Humana said Friday it's buying Inclusa, a Wisconsin-based provider of long-term care services for older adults and adults who have disabilities. Inclusa works through a Medicaid program in Wisconsin known as Family Care. Overall, there are more than 55,000 people enrolled in the Family Care program, according to Wisconsin's Department of Health Services. Inclusa provides services to around 15,500 people, per its website, which is more than a quarter of all Family Care enrollees. Humana did not disclose the financial terms of the deal (typically a sign it's small). It also must go through the standard regulatory process before it can officially close. This deal is not hugely significant from an immediate financial impact perspective. In general, state-based Medicaid plans are not the most important to the Humana story, especially within its retail segment where investors including us at the Club are primarily focused on Medicare Advantage plans. Overall, Medicaid is the only one of Humana's "core" business lines where the company does not have a top five market-share position, according to Bank of America, which estimates Medicaid is about 3% of pre-tax earnings. However, Humana has in recent years worked to grow its Medicaid presence, with members now totaling roughly 1 million people across Florida, Kentucky, Illinois, South Carolina and Wisconsin. The company also secured Medicaid contracts from the states of Ohio and Louisiana. Humana expects implementation in Ohio later this year, followed by Louisiana in 2023. Bottom line We like that Humana is working to deleverage its balance sheet following the Kindred hospice divestiture, while still leaning into the margin-expansion opportunities afforded by CenterWell's health-care services. The Wisconsin Medicaid-focused acquisition is minor, relatively speaking, but the company's strategy in this area is something to keep an eye on, especially as it relates to so-called "duals," people who are eligible for both Medicare and Medicaid. Humana's Medicaid business has seen strong growth as of late, even if that's happening off a small membership base and it remains a small piece of the revenue pie right now. All of this said, considerably more important for us at the Club is continuing to ensure that Humana's Medicare Advantage growth outlook stays back on track and additional progress occurs with its $1 billion value creation program (think productivity initiatives, cost savings and accretive past investments). We think the company has performed well on both fronts so far this year, and we are pleased with our investment in the company to date. We first bought 75 shares at roughly $459 apiece April 19 , helping make our portfolio more defensive in nature in the face of economic uncertainty. We now own 150 shares with a cost basis of $449.60. The stock trades at roughly $492 per share Friday, after reaching an all-time high of $497.47 in July. We currently have a 2 rating on Humana, meaning we'd wait for a pullback before scooping up additional shares. (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 . 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