Humana Earnings: Strong Medicare Growth and Manageable Medical Utilization Keep Outlook Intact

Narrow-moat Humana HUM turned in strong second-quarter results, and despite growing challenges such as increasing medical utilization in its core Medicare market, the company maintained its near- and longer-term outlook. Given that stability, our $550 fair value estimate does not look likely to change materially at first glance.

In the quarter, Humana’s strong annual election period in Medicare Advantage was on display, outpacing most peers with 16% membership growth year over year. Management expects 18% individual membership growth in that market for 2023. Part of this outperformance relates to Humana’s strong MA star ratings, which were announced in October 2022 and were much better than those of the other managed-care organizations we cover. With these strong scores and reputational factors likely attracting seniors choosing their 2023 plans, Humana continues to deliver robust results relative to peers and to its own weak membership growth in 2022, when it was more conservative with pricing, which resulted in lower membership growth but stellar profit growth. In 2023, Humana aims to better balance MA membership and profit growth, and it appears to be doing well on that front, turning in 11% adjusted EPS growth in the first half.

Despite increasing medical utilization, management continues to expect at least $28.25 of adjusted EPS in 2023, representing growth of 12% year over year. Also, management expects 2024 earnings growth to be within its long-term target range of 11%-15%, despite the growing headwinds expected industrywide in Medicare Advantage. Management still expects adjusted EPS of $37 for 2025, representing 14% growth compounded annually from 2022 to 2025. Our expectations remain roughly in line with this near- and intermediate-term guidance, and considering those maintained assumptions, our fair value estimate has not changed materially. The shares appear moderately undervalued to us.