Deutsche Bank upgrades Humana for the same reasons we own this big 2022 winner

Published Wed, Oct 26 20222:42 PM EDT

Club holding Humana (HUM) got an upgrade on Wall Street on Wednesday, exactly one week before the health insurer reports earnings. Deutsche Bank took Humana to a buy rating from a hold, citing its "leading position in Medicare Advantage," a key reason we own the company as a defensive play in this tough economic environment. Deutsche Bank analysts also raised their price target on Humana to $576 per share from $514, following an event held by the bank, during which six regional independent brokers evaluated the company and its competitors. The brokers, according to the analysts, highlighted that Humana's Star Ratings upgrade by the Centers for Medicare & Medicaid Services (CMS) could lead to a "multi-year competitive advantage." These so-called Star Ratings are designed to help consumers evaluate the quality of Medicare Advantage (MA) and Medicare Part D prescription drug plans, according to the CMS . MA plans are offered by government-approved private companies, which must adhere to the rules set by Medicare , the federal health insurance program for folks 65 and older and certain younger people with disabilities or permanent kidney failure. Shares of Humana rose about 1.5% on Wednesday to roughly $538 each. Year-to-date, the stock has outperformed the broader market, rising 15.8%. That's a stark contrast from the S & P 500 's decline of more than 19% in 2022. Humana stock was left for dead at the beginning of the year when it warned about Medicare Advantage growth. But since then, it has righted the ship. In Deutsche Bank's research note, analyst George Hill broke down several crucial points that lead to his upgrade and price target boost of Humana. Humana is "poised to take market share" in Medicare Advantage this enrollment season. The health insurer will likely benefit from tighter rules on health-care plan offerings, which will lead to less churn, or the rate at which customers stop subscribing to a service. While competitor UnitedHeatlh (UNH) could see member growth headwinds, Humana shouldn't face such challenges. Rather, Humana is "paving the way for market leading growth in 2024, if not 2023." Despite the optimism, Deutsche Bank did trim Humana's 2022 earnings estimate to $25.12 per share from its previous $25.27. However, that's still higher than the $24.94 consensus. The note cites downside risks including possible pricing pressure in Medicare Advantage, marketing rules changes that could lead to slower MA market growth, and health-care reform that could impact drug prices. We'll be digging into Humana earnings when it reports fiscal third quarter results on Wednesday, Nov. 2 before the opening bell. Analysts are anticipating earnings-per-share of $6.28, a 30% increase from the prior year, and total revenue growth of 9% to $22.76 billion, according to Refinitiv estimates. Bottom line Deutsche Bank deciding to join the bull camp on Humana is welcome news that further supports our conviction on the stock, which we own for its recession-resistant qualities. Unlike many other sectors that have been suffering this year due to macroeconomic challenges, health care is more safeguarded in an economic downturn since people prioritize their health and are less likely to skip on their health insurance payments. Furthermore, we believe Humana offers a superior Medicare Advantage package and represents new leadership in the health care industry. Here's our bull case. Humana experienced a huge turnaround from its lows in January when it warned of slower membership growth. In February, the Medicare provider announced plans to reduce costs and invest $1 billion worth of cost savings into its MA program. We believe this momentum can continue, especially since we see Humana's ability to expand its offerings as a benefit that could help it gain market share in a competitive healthcare landscape. Earlier this month, Humana released the details of its newly expanded and enhanced Medicare Advantage plan offering. The health insurer said it has the opportunity to grow its Medicare offerings to 4.6 million Medicare-eligible individuals across the country. At the same time, we acknowledge that the stock has had a great run since we started buying it in April . We're more likely to lock in some profits on our big gains into continued strength than add to our position. (Jim Cramer's Charitable Trust is long HUM. See here for a full list of the stocks.) 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In this photo illustration, Humana Inc. logo seen displayed on a tablet.

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