Humana's outlook brightens, positioning the health insurer for a year of upside

Published Wed, Apr 26 20231:36 PM EDT

Health insurer Humana 's (HUM) first-quarter earnings beat and guidance raise Wednesday more than made up for a negligible revenue miss, setting the Club holding up for solid growth throughout the rest of the year. Adjusted revenue increased 12% year-over-year, to $25.65 billion, slightly below analysts' forecasts of $26.44 billion, according to estimates compiled by Refinitiv. Adjusted earnings-per-share (EPS) increased 20% annually, to $9.38, exceeding the $9.27 per share predicted by analysts, Refinitiv data showed. Humana's benefits expense ratio — also known as the medical loss ratio, or MLR — was better than expected, at 85.5%, compared with the the 86.4% Wall Street expected, according to Factset. Bottom line This was, overall, a solid first quarter from Humana. While revenue came in slightly below forecasts, strong cost control resulted in a lower-than-expected MLR and better-than-expected profit. EPS not only beat analysts' predictions, but also exceeded management's — a result of strong membership growth and favorable inpatient utilization trends in the Medicare Advantage business. Accordingly, Humana raised its sales and earnings guidance for the full year. The EPS raise was greater than the magnitude of today's beat, implying that the strength seen in the first quarter will continue and that analysts will likely need to raise their forecasts for the remainder of the year. Looking forward, we expect the strong membership-growth rates seen in the first quarter to drive further upside throughout 2023. The first-quarter results increase our confidence that Humana will achieve its 2025 earnings target of $37 per share, a goal reaffirmed by management on Wednesday. As a result, we reiterate a 1 rating on the stock and maintain a $595-per-share price target. Outlook Humana raised its full year 2023 adjusted EPS forecast to "at least" $28.25 per share, an increase from the "at least" $28-per-share figure management previously provided. The company increased its total sales expectations for the full year, to a range of $104.4 billion to $106.4 billion, up from a prior range of $102.7 billion to $104.7 and well ahead of the 103.2 billion forecasted by Wall Street. The raise is based on an increase in insurance revenues, with management now targeting a range of $101.2 billion to $102.7 billion. On an adjusted basis, excluding the $3.7 billion related to the employer group commercial medical products business that Humana previously announced it would exit, the company anticipates revenue in the range of $100.7 billion to $102.7 billion. The 2023 benefits expense ratio range was left unchanged, in a range of 86.3% to 87.3%, slightly above the 86.6% ratio predicted by analysts at the midpoint. Management expects that figure to be "biased towards the upper half of the range," as a result of strong Medicare Advantage membership growth. Full-year operating cash flow guidance was also left unchanged, at $4.5 billion, compared with analysts' forecasts for $4.36 billion. Similarly, the company still expects capital expenditures to come in at around $1.2 billion, compared to expectations for $1.24 billion. There was also no change to segment operating income expectations or management's year-end medical membership assumptions. In February, Humana increased its year-end Medicare Advantage membership growth estimate by 150,000 members, to at least 775,000. Capital allocation During the first quarter, management repurchased 134,500 shares at an average price of $495.68 apiece, returning about roughly $66.67 million to shareholders in the process. There is about $2.8 billion remaining under the current share-buyback authorization. Given management's stated intention Wednesday to return $1 billion to shareholders in 2023, buybacks are likely to accelerate. (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.

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