Humana Halved Its New Member Forecast And Shocked Investors – But You Can Still Buy The Dip

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The share prices of health insurance companies are generally quite volatile, and particularly vulnerable to adverse news flow, missed targets, and lowered guidance. Such news tends to make the market jittery, and the resultant sell-offs are usually intense and sudden.

That’s the bad news – as evidenced by the 25% fall in the stock value of Humana (NYSE: HUM ), one of the largest pure play US health insurers by market cap – after the company announced this week a substantial reduction in the number of Medicare Advantage members it expected to add in 2022, to 150k – 200k members, down from 325k – 375k members.

The good news is that health insurers’ stock prices tend to recover – in fact, the sector performed admirably throughout 2021, and over a five-year period, three of the big five health insurers – Anthem (NYSE: ANTM ), United Health (NYSE: UNH ) and Centene (NYSE: CNC ) – have substantially outperformed the S&P 500, which itself has grown in value by >100%. share price performance of major health insurers ANTM, CNC, CI, UNH and HUM – past 5 years vs S&P 500 Had it not been for last week’s news, Humana itself would be ahead of the S&P 500, leaving only Cigna – 62% over the past five years – as a relative laggard. The performance of Molina Healthcare (NYSE: MOH ) – a younger, smaller company – has been even more impressive, at +398% over the past five years.

It’s tempting to think then, that despite cutting its expectation for new Medicare Advantage (“MA”) members by half, Humana’s share price will rise again – after all, the company is guiding for earnings per share of ~$20.5 in FY21, which translates to a respectable forward price to earnings ratio of ~19x, its price to sales ratio – based on 2020 income – is an almost absurdly low 0.6x, and management is promising 11 – 15% EPS growth in 2022 and 2023.

All of the above makes Humana stock a potentially sound investment opportunity. The stock price has already begun to recover – from a low of $350 on 7th Jan, to $395 before market open today. Humana also pays a small dividend of $0.7 per quarter, or $2.8 per annum, which represents a yield of 0.7%.

Humana has generally traded >$400 since recovering from its last major selloff, in March 2020 when a global pandemic was first declared and the stock price fell to $230, before climbing back to >$400 by late May.

Nevertheless, Humana’s recent struggles should not necessarily be dismissed, with a number of new market entrants determined to eat into the incumbent’s market share, providing customers with greater choice, but also potentially creating integrity issues for a Medicare Advantage market that already faces the prospect of systemic change.

In this post, I will discuss how the situation is playing out. Humana’ Leadership In Medicare Advantage Has Made It Highly Successful and There May Be More To Come

Humana is the second largest provider of Medicare Advantage healthcare insurance, behind only UnitedHealthcare, with ~4.8 members as of Q121 (according to an investor day presentation ). This market was forecast to reach some 26m members this year, and is expected to account for >50% of all Medicare enrollment by 2030.

Based on its past three years’ net income of $1.7bn, $2.7bn, and $3.4bn, and assuming a compound annual growth rate (“CAGR”) for EPS of ~15%, and a weighted average cost of capital of ~9%, using discounted cash flow analysis I arrive at a target share price for Humana of ~$550, implying that investors can be confident of long term share price growth provided there are no unexpected developments.

Clearly, however the drop in expected new enrollees in 2022 has spooked investors – should they be worried? Newcomers Are Crowding the MA market

The fact is that the MA space has become more competitive, with new entrants coming to market – there have been major IPOs in the past year for Oscar Health (NYSE: OSCR ), Bright Health Group (NYSE: BHG ), and Alignment Healthcare (NASDAQ: ALHC ), who are all now competing for the same customers as Humana. share price performance of newcomers to the health insurance market since IPO TradingView As we can see above, all 3 of these new companies have seen their valuations fall significantly since IPO, which is arguably good news for Humana, the incumbent, but it’s also clear that Humana has been losing members and failing to capture as […]

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