Our measured approach to Humana positioned us well for Thursday's bounce and for whatever comes next

Published Thu, Sep 15 20224:49 PM EDT

Ahead of Humana (HUM)'s investor meeting Thursday, we were cautious about where the company would take its forward guidance. But we were pleasantly surprised by its upbeat forecasts, and so was Wall Street because shares of the Club holding rose nearly 8.5% on the news. The health insurer announced the following before the opening bell. Humana increased its adjusted earnings per share guidance for full-year 2022 to about $25, up 25 cents from its previous estimate. That represents 21% growth from 2021 and beats the FactSet consensus estimate of $24.83 per share. Management also forecasted continued earnings growth into 2026 and beyond at a mid-term adjusted EPS target of $37 for year ending Dec. 31, 2025. That would be a 14% compounded annual growth rate over the company's updated full-year 2022 adjusted EPS outlook mentioned above. We knew there was a possibility that Humana would raise its target, which could cause the stock to rally. But at the same time, we wanted to balance short-term economic uncertainty with what appeared to be overoptimistic analyst commentary. This is why we made a protective sale of 30 Humana shares on Wednesday, which represents a much smaller value than our remaining position. This strategy was to protect us against any potential bad news that could have pushed the stock lower. It turns out our measured approach was a good idea — given the stock was up and since we still have a chuck of HUM shares in our portfolio. In the Investing Club's " Monthly Meeting " on Thursday, Jim Cramer said he liked to hear medical costs for Humana's Medicare Advantage and Medicaid businesses are coming down and Covid headwinds are receding. He added that while Humana's plan was a clear loser last year, which resulted in the company losing share from UnitedHealth Group (UNH). It turned around as a winner, taking share back. Humana has come a long way from the beginning of this year when it cut its growth prospects for Medicare Advantage in 2022 to now when it showed a stronger outlook for long-term growth. The stock closed out 2021 at around $466 per share. It nosedived just days into January on that warning. In a year when the S & P 500 has dropped 18%, Humana shares have gained more than 7% for all of 2022, closing at $497.24 on Thursday— a little over $7 away from its 52-week high in August. Bottom line Humana's updated EPS outlook comes thanks to the release of the Covid headwind it held in its guidance, which was 50 cents per share. However, rather than pass the entirety of that to the guide, management only added half, noting the remaining 25 cents per share would be reinvested into additional 2023 Medicare Advantage marketing. That's assuming no unexpected additional costs, such as a worse than expected flu season. This can help boost Medicare Advantage revenue and ultimately help Humana get on the path of $37 per share. As a reminder, we own Humana for its defensive qualities, which are suitable in an economic slowdown. In this challenged environment, the company is less susceptible to interest rate changes, the strong dollar and consumer discretionary spending pullbacks. We see Humana as a buffer in recessionary periods because people view health care as a necessity and will likely not abandon their insurance payments. We are confident that the Medicare Advantage business will continue to grow. Humana's investor day presentation notes Medicare-eligible individuals in the U.S. today is 64.3 million. As the population grows and more people age into Medicare eligibility, we think Humana is well-positioned for more growth in this segment. We are bullish on Humana's $1 billion value creation initiative, which invests in its Medicare Advantage products, a key driver of the company's growth, includes cost-cutting efforts and funding of other health care services. Humana has a diversified healthcare business that sets it apart from its competitors. While it's business largely comes from Medicare Advantage plans sold to retail customers, we should point out that Humana's services expand the addressable health care market. Other earnings contributors include pharmacy, primary care and home health, all of which have increasingly been representing a large chuck of Humana's overall business. These areas add to profit opportunities for Humana. In Humana's fiscal second quarter , it was higher pharmacy revenue, driven by strong individual Medicare Advantage membership growth along with revenues from Humana's 2021 acquisition of home-based clinical solutions company, Kindred at Home that led to the company's Healthcare Services segment to increase 19% year over year to $8.96 billion. In the same quarter, its Medicare Advantage business, which had an already strong start to the year helped delivered a 13% increase in Humana's retail segment to $20.95 billion driven individual Medicare Advantage, membership growth in states-based contracts and higher per member individual Medicare Advantage premiums. (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. 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The Humana headquarters office stands in Louisville, Kentucky.

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