On Tuesday, Bernstein SocGen Group shifted its stance on Humana (NYSE:HUM), raising the stock's rating from Market Perform to Outperform, despite a decrease in the price target to $308 from the previous $405.
"We are updating our model, decreasing our target price, but upgrading our rating to Outperform based on a view that risks are being incorporated into expectations and price, coupled with improving sector outlook and potential upside catalysts," said Bernstein analysts in a note.
The firm's decision comes after Humana's recent announcement of a significant drop in Stars ratings. The analyst anticipates a decline in STARS ratings for 2026, in line with Humana's disclosure that about 25% of members will be in 4+ star plans. This is expected to be partially offset by pricing adjustments and member migration efforts, which could mitigate approximately two-thirds of the impact on the medical loss ratio (MLR). However, these efforts are also projected to worsen the operating expense ratio by 40 basis points, with a predicted membership decline of 4.1% for 2026.
The changes in Humana's outlook have led to a revision in the firm's financial model. The adjusted earnings per share (EPS) for fiscal year 2026 is now estimated to decline by approximately 24%, standing at $18.91 compared to the previous forecast of $24.90. The adjusted EPS for fiscal year 2027 is also projected to see a 16% decline, now at $25.67 from the earlier $30.53 estimate.
The reduction in Humana's price target to $308 from $405 is attributed to a lower target multiple, now set at 16.0 times the next twelve months' (NTM) EPS, down from 18.0 times. This adjustment reflects the anticipated delay in earnings recovery due to the impact of lower STARS ratings. The new NTM EPS forecast has been adjusted downwards to $19.27 from the prior estimate of $22.50, driven by the expected lower enrollment and reduced star payments.
In other recent news, Jefferies adjusted its rating from Buy to Hold, citing concerns regarding the potential impact of Humana's Stars appeal on the company's earnings per share by 2026. Piper Sandler also downgraded the stock from Overweight to Neutral, influenced by the decline in star ratings from 94% to 25% of members in plans rated 4.0+ stars.
BofA Securities downgraded Humana from Buy to Underperform, citing anticipated revenue impact due to a reduction in bonus payments from Medicare. However, Barclays and TD Cowen have maintained their Overweight and Buy ratings respectively. Leerink Partners downgraded Humana's stock from Outperform to Market Perform due to future performance concerns stemming from the lower star ratings.
Wells Fargo's analysis suggests that Humana could face a revenue headwind of approximately $2.9 billion due to potential risks for certain contracts. This could translate to an $18.93 impact on earnings per share. Despite these challenges, Humana is actively exploring options to mitigate the expected revenue headwind for 2026 related to the 2025 Star ratings.
InvestingPro Insights
Recent InvestingPro data and tips offer additional context to Humana's current situation and Bernstein SocGen Group's analysis. Despite the challenges highlighted in the article, InvestingPro Tips reveal that Humana "holds more cash than debt on its balance sheet" and "has raised its dividend for 7 consecutive years," suggesting financial stability amidst the projected earnings decline.
The company's P/E Ratio (Adjusted) for the last twelve months as of Q2 2024 stands at 12.78, which is lower than the current P/E Ratio of 16.8. This could indicate that the stock might be undervalued relative to its recent earnings, aligning with Bernstein's upgrade to Outperform.
Additionally, InvestingPro data shows that Humana's revenue for the last twelve months as of Q2 2024 was $112.04 billion, with a revenue growth of 13.48% over the same period. This growth, coupled with the company's status as a "prominent player in the Healthcare Providers & Services industry," may support the potential for recovery that Bernstein suggests.
For investors seeking a more comprehensive analysis, InvestingPro offers 11 additional tips for Humana, providing a deeper understanding of the company's financial health and market position.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.