Why Is Humana Stock Dropping?

At face value it’s not clear why Humana (NYSE:HUM) stock should be on the decline. With 17 million medical members and 5 million specialty members, shareholders can count on predictable revenues no matter how the economy goes. And yet HUM share price is down 33% year-to-date.

Why is Humana stock dropping? Humana stock has been dropping this year due to higher Medicare Advantage costs that have hurt medical loss ratios as service usage rose.

As the incidence of chronic conditions like diabetes, cancer, musculoskeletal disorders, neurological disorders such as stroke and dementia, cardiovascular diseases including heart disease and hypertension, and respiratory diseases such as asthma or chronic obstructed pulmonary disorder have risen, Humana’s profitability has been hurt.

So what does the future hold for Humana?

Will Humana Stock Bounce Back?

One primary catalyst to support a share price bounce back is that Humana sits in a growing industry.

The global health insurance market was worth $2.6 trillion in 2023 but is expect to grow at a CAGR of 9.8% to reach $6.2 trillion by 2032, suggesting substantial investment and growth possibilities within the sector.

Humana Inc. (NYSE:HUM) holds a strong market share as well as a substantial stake in the medical and specialty insurance products sector in the US.

The company operates through two main segments: Insurance and CenterWell. It provides comprehensive dental, vision, and life insurance plans and additional health benefits but will these be enough to drive a share price resurgence?

Short-term & Long-term Positives Surface

In their recent earnings release call, management reported an increased Medicare claims auto adjudication rate by about 70 basis points. They also noted making progress in logistic improvements at Humana’s specialty pharmacy facility, which has lowered transit times and delivery costs.

Improvements in the digital enrollment process have been seen too, leading to higher conversion rates and lower distribution expenses.

Several multiyear projects to support cost efficiencies are also ongoing. Humana recently made a deal with Google to grow its exposure and use of artificial intelligence.

Management is clearly hoping this move will decrease costs and improve customers’ interactions with it. In addition, Humana has invested in Healthpilot, which uses AI for better Medicare Advantage shopping.

They also signed a lease agreement with Walmart Inc. (NYSE:WMT). This might help Humana set up its main care clinics faster. These actions highlight how Humana isn’t resting on its laurels but rather is aiming to reinvigorate its share price through new initiatives.

Is Humana a Good Stock to Buy?

When you look under the hood, there is lots to like about Humana to make it a good stock to buy. It seems management agrees because a share buyback is in place now.

They have also signaled their confidence in the future by raising the dividend for 7 consecutive years. And you can see where that confidence originates from when you look to the top line.

In the fiscal second quarter that finished on June 30, 2024, Humana saw a rise in total revenues by 10.4% to $29.54 billion compared with the same period last year but there was a notable decrease of 20.5% in income from operations, which amounted to $1.14 billion for the quarter.

Net income and earnings per common share experienced significant declines. Net income dropped by 29.1% to $678 million, while earnings per common share decreased by 26.6% to $5.62. These reductions reveal difficulties in sustaining profits even with an increase in revenue.

On the balance sheet, Humana had $5.50 billion in cash and cash equivalents, up from $4.69 billion as of December 31, 2023 while total current assets rose to $32.86 billion, compared with last year’s end figure of $29.99 billion.

What Is Humana’s Investment Outlook?

Analysts forecast that Humana share price could rise to $393 per share, a 28.2% rise, before reaching fair value.

They estimate that revenues will rise to $115.61 billion for the fiscal year that ends in December 2024, an increase of 8.7% year-over-year. On the other hand, EPS is expected to fall to $16.24, a drop of around 37.8% from last year’s numbers.

For the following fiscal year ending December 2025, Humana’s revenues are expected to rise marginally to $116.45 billion. Analysts anticipate its EPS growing by 23.7% from last year to $20.09 per share in the next fiscal year.

From a valuation perspective, Humana is trading at a forward EV/sales of 0.45x, which means it’s 87.4% cheaper compared to the industry average of 3.53x.

Its forward EV/EBITDA ratio is 12.98x, about 5.1% lower than the industry average of around 13.67x. Also important to note is the stock’s forward price/sales ratio, at 0.38x, approximately 89.6% less than the sector average of 3.64x.

But, the forward non-GAAP P/E is 22.39x, which is 6.2% higher than the industry average of 21.08x and forward non-GAAP PEG is 4.82x compared with the sector average of 152.70x.

What does this all boil down to? Humana isn’t a steal trading at a 22x price-to-earnings ratio but with net income growth of 7.9% annualized over the next 5 years it’s not particularly expensive either.

Analysts and a discounted cash flow forecast both line up with a view that the share price has the potential to rise by as much as 28% before intrinsic value is reached. And management is clearly on board with that view and put their money where their beliefs are by following through on a share buyback, which so far this year has amounted to close to $750 million.

All in all, that signals better times likely lie ahead for Humana shareholders than can be seen in the rearview mirror.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.