JPMorgan has maintained its Overweight rating and $45.00 price target for Evolent Health (NYSE: NYSE:EVH), despite recent updates from Humana (NYSE:HUM) that may affect its business.
Humana, a significant customer contributing to 21.8% of Evolent's second-quarter 2024 revenue, announced that it expects a decrease in the number of its Medicare Advantage (MA) members enrolled in 4+ star rated plans for 2025. This shift from 94% in 2024 could lead to potential enrollment and payment challenges for Humana in the following year.
Evolent Health's management has indicated that the company's fees for managing specialty care in MA contracts are unlikely to be impacted, as they are fixed and set to increase annually, independent of Humana's plan premiums or bonuses. However, there is a possibility that Evolent's membership count could be affected in the short term if Humana sees a reduction in its membership count going into 2025 and 2026, although some of this risk was already anticipated.
The medium-term to long-term outlook for Evolent Health could see benefits from Humana's pressured margins, as the latter may seek guaranteed savings to compensate. This scenario could serve as a potential tailwind for Evolent moving from 2025 into 2026.
In other recent news, Humana has experienced a significant decrease in members enrolled in 4+ Stars plans, dropping from 94% in 2024 to approximately 25% in 2025. The decline is attributed to the rating of Humana's largest contract, H5216, falling to 3.5 Stars from 4.5 Stars.
Morgan Stanley maintained an Equal-weight rating on Humana, despite this shift, which the firm noted was unexpected and could impact the company's near-term prospects. In response,
Leerink Partners downgraded Humana's stock from Outperform to Market Perform, citing concerns over the company's future performance.
JPMorgan maintained a Neutral rating, acknowledging Humana's efforts to appeal the process with the Centers for Medicare & Medicaid Services (CMS) and implement cost-saving measures.
Despite these efforts, the unmitigated earnings per share (EPS) impact for 2026 is estimated to be approximately 90%, based on the new proportion of members in 4+ Stars plans. Humana is actively exploring options to mitigate the expected revenue headwind for 2026 related to the 2025 Star ratings.
InvestingPro Insights
To provide additional context to the Humana situation and its potential impact on Evolent Health, let's look at some key metrics for Humana (NYSE: HUM) from InvestingPro.
Humana's market capitalization stands at $30.0 billion, reflecting its significant presence in the healthcare sector. The company's P/E ratio of 17.4 suggests a reasonable valuation compared to industry peers. Notably, Humana has demonstrated strong revenue growth, with a 13.48% increase in the last twelve months as of Q2 2024, reaching $112.04 billion.
InvestingPro Tips highlight that Humana has been aggressively buying back shares and has raised its dividend for 7 consecutive years, indicating a commitment to shareholder returns. This could potentially help mitigate some investor concerns about the Medicare Advantage star rating challenges mentioned in the article.
However, it's worth noting that Humana's stock has taken a significant hit recently, with a 20.95% decline in the past month and a 38.48% drop year-to-date. This aligns with the article's discussion of potential enrollment and payment challenges for Humana in the coming year.
For investors seeking a more comprehensive analysis, InvestingPro offers 12 additional tips for Humana, providing deeper insights into the company's financial health and market position.
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