57.96 +0.64: With the Democrats now controlling Congress, the uncertainty regarding the outlook for Medicare has weighed on health insurance stocks like Humana. Given the fact that the company derives roughly three-quarters of its revenues and more than 50% in profits from administering government health plans to seniors makes HUM more exposed to changes in government reimbursement rates.
Going into the quarter, market participants were less focused on profits and revenues and more focused on the company's forecast for Medicare. The concern over the possibility that the Democrats will slash reimbursement rates has shaved nearly 25% off its share price since the September highs. Against all expectations, the company today raised forecasts for the full year to $4.00 to $4.20 per share indicating 38-45% earnings growth on revenues of $24-$26 bln. This compares to consensus of $3.89 per share and $24.8 bln, respectively.
In the fourth quarter, HUM's profits more than doubled to $155 mln or 92 cents per share on robust enrollment, besting expectations by 4 cents. Revenues grew 54% to $5.66 bln. Humana has roughly 3.5 mln members within its Medicare drug benefit plans and another million Medicare Advantage members for which the company managed doctor and hospital visits. In the quarter, Advantage premiums nearly doubled to $2.3 bln as the company expanded its geographic reach, improved brand awareness, and gained market share.
The company projects member growth of 50,000 to 75,000 in commercial members in 2007 and Medicare advantage enrollment of 400,000 - slightly above expectations. Meanwhile, today, UnitedHealth Group (UNH), the only US insurer with a larger Medicare enrollment than HUM, lowered its 2007 revenue forecast citing lower Medicare Advantage membership.
Despite forecasts of lower first quarter earnings, Humana's membership and earnings guidance have eased investors' concerns, sparking a 1% rise in shares in early trading. While headline risks remain, HUM's operational performance enhances its growth outlook. HUM remains one of the best ways to invest in the expansion and privatization of Medicare. The stock has declined nearly 15% from September highs and is now trading at 14.8x FY07 and 12.6x FY08 earnings.
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