Humana: Top-Rated Medicare Advantage Insurer With Room To Grow (NYSE:HUM)

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“Hey Elon Musk, I bet you can’t buy Humana!” Health insurance coverage shares are having a second. As one of many few sectors which have up to now remained unaffected by each inflation and tightening client spending, well being insurers and Humana (NYSE:HUM) specifically have served as a superb inflation hedge over the previous yr, with HUM outperforming the S&P 500 (SPY) by over 30%.

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Data by YCharts

But final week the deflationary shoe lastly dropped. October’s total and core CPI each got here in significantly lower than expected, Treasury yields and the greenback fell, and hopes for an eventual Fed pivot and a potential smooth financial touchdown grew.

The Risk-On Pivot Is Here

These hopes could very properly develop into short-lived, however it was no shock that this was the catalyst the market had been ready for. Optimistic traders with pent-up demand instantly pivoted to risk-on mode and started taking earnings in some defensive shares which have bucked the bear market, foremost amongst them well being insurers, with Humana, Cigna (CI), UnitedHealth (UNH), and Elevance (ELV) all down between 4% to six% on Friday.

It’s tempting to observe the herd in moments like this, and certainly a momentum trade into development shares would possibly prove properly within the short-term right here, however I feel it will be sensible for long-term traders to view this as a chance so as to add to their blue-chip insurance coverage shares at quickly decrease costs for 2 causes.

First of all, “Don’t fight the Fed” nonetheless applies, as Jerome Powell has repeatedly acknowledged that the Fed will not change its hawkish fee stance till they see a sustained decline in inflation — i.e., a number of month-to-month CPI readouts that shock to the draw back — that confirms their objective of returning to 2% YoY inflation is achievable. Many speculate that the Fed would possibly finally settle for the next long-term objective of 3-4% if 2% finally appears inconceivable, however both manner October’s total CPI determine of seven.7% remains to be nowhere shut.

Even if November’s figures are equally constructive, it is secure to imagine that rates of interest and Treasury yields will stay excessive for fairly a while earlier than the Fed deems inflation to be beneath management and begins forecasting fee cuts. And if November’s CPI numbers are worse than anticipated, we are going to possible see the risk-on trade evaporate with a big market selloff whereas inflation-proof defensive shares surge once more. This is to say nothing of job numbers, which Powell has additionally been decided to see materially worsen as an indication of relenting inflation and will additionally dampen the optimistic temper in the event that they proceed to shock to the upside.

Second, well being insurers roundly delivered implausible outcomes and forecasts of their current Q3 earnings reviews, and because of this are nonetheless buying and selling at cheap valuations regardless of their robust efficiency over the previous yr. To me it is a basic instance of merchants taking earnings in corporations after a yr of nice efficiency, which can intermittently proceed by way of the top of the yr as funds rebalance their holdings and outperforming shares comparable to HUM are introduced again to decrease goal weightings. This profit-taking and fund rebalancing mixed with a number of CPI-driven selloffs ought to present us lowly retail traders with some good value dips to pounce on.

Humana logo

Humana

Plenty Of Room To Grow

Despite a difficult macro surroundings, Humana is firing on all cylinders. Q3 income development remained robust at 10% YoY and adjusted earnings grew a whopping 42% pushed largely by a rise in Medicare Advantage members and premiums, and the corporate simply introduced an accelerated $1 billion share buyback set to shut in This fall representing 1.4% of its market cap.

After taking a extra conservative method in 2022 with solely 3.5% total MA development, Humana is concentrated on increasing its extremely worthwhile Medicare Advantage plans in 2023, searching for so as to add as much as 400,000 new members for an ahead annual development fee of 7-9%. The firm at the moment is the second-largest Medicare Advantage plan supplier with a 19% market share, trailing UNH’s 27% by a large margin. While Medicare Advantage is an more and more aggressive area of interest, Humana is well-positioned to seize further market share because it now affords MA or Medigap plans (or each) in each state and its MA plans are the very best rated amongst all of its friends.

Future development will possible additionally come through acquisitions, with a lot dialogue over CVS and Humana’s mutual curiosity in shopping for Cano Health (CANO) to increase their major care choices. Humana’s final main $5.7 billion acquisition in 2021 noticed the corporate soak up Kindred at Home, the most important US house well being and hospice supplier, into its CenterWell model. As the fifth-largest US medical health insurance firm with disciplined administration and no scarcity of takeover targets, I consider HUM has an extended development runway forward of it.

Dividend Outlook

HUM Dividends

HUM Dividends (Seeking Alpha)

Although in recent times administration has opted to favour stock buybacks as the corporate’s major manner of returning money to its shareholders, traders should not overlook Humana’s large dividend development potential. Despite its low 0.60% yield, with the bottom payout ratio amongst its rivals at solely 12.3% and a 5-year dividend CAGR of 15.5%, HUM may double its dividend at the moment and nonetheless have a decrease payout ratio than UNH, which I and lots of others view because the gold normal of well being care dividends.

Time will inform, as HUM’s 10-year dividend development historical past is a bit misleading since its 12-15% CAGR did not start constantly till 2017, whereas UNH’s 15-20+% raises started in 2010. HUM additionally logged a comparatively disappointing 12.4% dividend hike this yr, though share buybacks will add one other 3% to the general yield for the yr.

Still, it maintains an A+ dividend security score from Seeking Alpha with mid-double-digit dividend development, so at the least we can’t be disenchanted by a dividend reduce whereas we wait and hope for administration to convey HUM’s yield consistent with UNH and CI.

Valuation

Humana has raised and beat its earnings projections a number of instances this yr, and whereas it is largely consistent with its historic valuation ranges, it’s only buying and selling at roughly 14x its projected 2025 adjusted earnings of $37 per share. Management is concentrating on long-term earnings development of 11-15% however has majorly overdelivered this yr with 21% projected EPS development in 2022.

Even although HUM has outperformed the general market and most of its friends this yr, its glorious top- and bottom-line development has stored it largely consistent with its historic valuation metrics (however Seeking Alpha’s Valuation Grade of F). As we are able to see, HUM’s ahead development metrics are barely increased than previously, so I feel it deserves to trade on the present premium to its historic PE and PS ratios. For me, that is basically what a reasonably valued stock seems to be like:

HUM (11-13-22) P/E P/S Rev Growth EPS Growth PEG Ratio
Current Value [FWD] 22.90 0.72 9.15% 17.66% 1.29
5-Year Average 20.17 0.67 9.12% 14.15% 1.42

Conclusion

I admittedly bought my positions in UNH and CI to lock in earnings after I noticed the October CPI numbers, with plans to purchase once more at decrease costs. Luckily, considerably decrease costs are already right here, and we could get further pullbacks within the coming days and weeks if the bear market rally fades just like the final one. I fee HUM a robust purchase primarily based on present power, macro resilience, and ahead development.

Although I’ve tried to current a bear market case right here along with the explanations I feel Humana is a long-term winner whatever the rate of interest surroundings, I do suppose there are causes to be optimistic about final week’s rally sustaining. If it does and inflation-hedging shares like HUM proceed to return beneath promoting strain, I nonetheless suppose long-term traders would do properly to think about including HUM and its friends UNH and CI on any dips.



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