Humana is set to soar in 2023 after delivering strong Q4

Published Wed, Feb 1 20232:50 PM ESTUpdated Wed, Mar 8 20231:57 PM EST

Health insurer Humana (HUM) on Wednesday reported a stellar fourth quarter and provided a robust full-year outlook, setting the Club holding up for significant growth in 2023. Revenue increased 5.9% year-over-year, to $22.44 billion, slightly below analysts' forecasts of $22.5 billion, according to estimates compiled by Refinitiv. Adjusted earnings-per-share (EPS) increased 30.1% annually, to $1.62 a share, exceeding the $1.46 per share predicted by analysts. Humana's benefits expense ratio — also known as medical loss ratio, or MLR — was in line with the 87.3% ratio expected by Wall Street. Bottom line Despite the negligible miss on the top line, Humana delivered a solid quarterly report, with the medical cost ratio falling 60 basis points year-over-year and insurance premiums above expectations. The health insurer is also seemingly well on its way to achieving its longer-term target of earnings-per-share of $37 by 2025, a result of Medicare Advantage growth that is expected to be realized a full year ahead of schedule. That growth, ahead of Humana's industry peers, comes from a combination of better-than-expected membership retention — which improved 200 basis points year-over-year, double management's expectations — and the fact that 50% of new customers are moving over to Humana from competitor plans this year, up from 30% in 2022. The company's sales forecast for the full year was slightly ahead of expectations, while earnings guidance was in line with Wall Street's projections — though, there is likely a good deal of conservatism baked in. While the 2023 guidance implies growth at the low end of Humana's long-term earnings growth range of 11% to 15%, management has demonstrated an ability to under-promise and over-deliver on earnings. To that end, Humana on Wednesday delivered adjusted earnings-per-share for 2022 of $25.24 a share, ahead of a previous forecast for roughly $25 a share. The company had initially guided for earnings-per-share of at least $24 for 2022 and subsequently raised their expectations with each quarter. It's abundantly clear that Humana has entered 2023 from a position of strength and, as a result, we reiterate our 1 rating on the stock and a price target of $595 per share. Outlook Management guided for full year 2023 adjusted earnings-per-share to be at least $28, in line with analysts' forecasts. This guidance comes despite a 92 cent per share headwind related to the divestiture of Humana's 60% stake in the hospice division of Kindred at Home in August 2022. Total sales for this year are expected to be in the range of $102.7 billion to $104.7 billion, ahead of the $102.05 billion consensus estimate. The 2023 benefits expense ratio range of 86.3% to 87.3% is slightly above the 86.3% ratio predicted by analysts, at the midpoint. But 20 basis points of that is attributable to targeted investments in Medicare Advantage and Medicaid, which carries a higher benefit expense ratio. On the Medicare Advantage front, management anticipates individual membership growth of at least 625,000, representing growth of 13.7% on membership rates at the end of 2022. Notably, this growth rate is expected to be "meaningfully higher" than the industry growth rate, implying market share gains throughout this year. Management on Wednesday said the company's 2025 earnings-per-share target of $37 is underpinned by an assumption of a return to individual Medicare Advantage membership growth at, or above, the industry rate by 2024. But given the company already expects to be above the industry growth rate in 2023, Humana is ahead of expectations — bolstering the Club's confidence in the achievability its long-term outlook. Management also said they expect approximately 35% of full-year earnings to be realized in the first quarter of 2023. Using the full year $28-per-share earnings forecast as a base line implies first-quarter adjusted earnings-per-share of roughly $9.80, ahead of the $8.65 per share predicted by analysts for the current quarter. Full-year operating cash flow is expected to be about $4.5 billion and capital expenditures are anticipated to amount to $1.2 billion, compared to expectations for $4.96 billion and $1.4 billion, respectively. Medicare Advantage RADV Management on Wednesday also acknowledged the Medicare Advantage Risk Adjustment Data Validation program, the Centers for Medicare and Medicaid Services' (CMS) primary audit and oversight tool for Medicare Advantage payments . The CMS earlier this week released a new rule for the program that had been expected to weigh on the managed care sector. JP Morgan has estimated that the associated audits could be a headwind to Humana's adjusted earnings to the tune of about 66 cents per share, or about 2.3% of the company's projected earnings for 2023. But Humana's management only said they're still "reviewing the final rule and considering its impact." We will be on the lookout for more clarity as it's currently unclear to what extent, if any, this new ruling factored into the company's forward guidance. Capital allocation On Wednesday's earnings conference call, management acknowledged the importance of returning cash to shareholders, hinting at the possibility of another accelerated share repurchase program in addition to open market repurchases – music to our ears. During the fourth quarter, in November, management repurchased slightly more than 1.87 million shares at an average price of $532.02 per share under an accelerated share repurchase program, returning about $1 billion to shareholders in the process. There's about $1 billion remaining under the current authorization. Note : With Humana's fourth-quarter release, management has updated its reporting structure and now provides results in two segments: Insurance and CenterWell. To assist investors in making the transition, Humana also provided a brief breakdown under the old reporting structure. We have provided results in both formats and included estimates where possible. (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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Bruce Broussard, CEO, Humana

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Health insurer Humana (HUM) on Wednesday reported a stellar fourth quarter and provided a robust full-year outlook, setting the Club holding up for significant growth in 2023.