On Friday, Jefferies reiterated its Buy rating on Humana (NYSE:HUM) with a price target of $419.00. The firm addressed the recent 15% decline in Humana's share price since early September, attributing the drop to investor concerns. These concerns are centered around the potential downgrade of Humana's approximately 2.8 million PPO contract, H5216, from a 4.5-star rating to a 3.5-star rating, which could result in a roughly $9 earnings per share (EPS) deficit in 2026.
The firm suggests that while some of the potential negative impact is already reflected in the stock price, not all of it is. This situation presents a "binary event" where the stock could experience a significant move in either direction based on the eventual outcome. The analyst from Jefferies believes that the calculations seem to favor Humana, anticipating a 4-star result as the more likely scenario. According to the firm, this expectation could tilt the risk/reward balance positively for investors.
The star ratings in question are a key component in determining the level of federal reimbursement that health plans like Humana's receive. A drop in the star rating could lead to reduced payments from Medicare, which would negatively affect Humana's financial performance. Conversely, maintaining or improving the star rating would likely have a positive impact on the company's earnings.
The analyst's commentary highlights the importance of the star rating outcome for Humana's financial future. A 4-star rating is seen as the base case by Jefferies, which could provide upside potential for the company's shares. This perspective is despite the uncertainty that has been affecting the stock's recent performance.
In other recent news, Humana Inc (NYSE:HUM). has seen significant growth in its Medicare business, leading to a robust performance in the second quarter of 2024 that surpassed expectations. Despite facing increased inpatient costs, the company has managed to navigate these pressures through clinical appropriateness and provider negotiations. Humana has reaffirmed its full-year adjusted earnings per share (EPS) and benefit ratio guidance for 2024, indicating a positive outlook for future growth, particularly in the Medicaid and CenterWell businesses.
RBC Capital maintained its Outperform rating on Humana shares and raised the stock's price target to $400 from $385, following a comprehensive review of the company's performance. The firm's revised model incorporates the latest second-quarter results and accounts for management's guidance on seasonal trends that may influence future performance. RBC Capital's decision reflects confidence in Humana's ability to manage these seasonal variations effectively.
Humana also raised its revenue guidance by $3 billion, primarily due to membership growth. However, the company anticipates higher inpatient volumes to increase the medical loss ratio (MLR) in the latter half of the year. To manage costs, Humana is focused on driving process redesign with automation technology and is undergoing a strategic review of general and administrative expenses.
InvestingPro Insights
In light of the recent volatility in Humana's stock, a closer look at the company through the lens of InvestingPro data and insights could be beneficial for investors. Humana's market capitalization stands at $37.69 billion, with a P/E ratio of 22.18, suggesting that the stock is being valued by the market at a level consistent with its earnings. The adjusted P/E ratio for the last twelve months as of Q2 2024 is 16.94, which might indicate a more favorable earnings perspective moving forward.
An InvestingPro Tip that stands out is Humana's practice of aggressive share buybacks, which could be a signal of management's confidence in the company's value. Moreover, the company has raised its dividend for 7 consecutive years and has maintained dividend payments for 14 consecutive years, demonstrating a commitment to returning value to shareholders. This information is particularly relevant given the potential EPS impact from the star rating change discussed in the article.
Additionally, Humana is trading near its 52-week low, which might interest value-oriented investors. The company's revenue has grown by 13.48% over the last twelve months as of Q2 2024, indicating robust business performance. For those considering an investment in Humana, these metrics and insights could provide a deeper understanding of the company's financial health and market position. For a more comprehensive analysis, investors can find additional InvestingPro Tips on Humana at https://www.investing.com/pro/HUM.
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