Investing.com -- Humana Inc (NYSE:HUM). received a notable upgrade from Bernstein analysts on Tuesday, with the firm moving its rating for the stock from Market-Perform to Outperform, despite the company's recent challenges.
The analysts are now optimistic about Humana's prospects, citing several factors that contribute to a more favorable outlook.
According to Bernstein, the upgrade is based on "a view that risks are being incorporated into expectations and price," as well as an "improved sector outlook and potential upside catalysts."
They believe that Humana's operating outlook for Medicare Advantage (MA) has improved, and uncertainties regarding risks such as STARS ratings and repricing execution are becoming clearer.
Bernstein noted that the stock has been "reduced" in price, enhancing the balance of upside risks compared to downside risks, including potential takeover interest and Pharmacy Benefit Manager (PBM) outsourcing.
However, Bernstein has adjusted its financial model in light of Humana's recent announcement regarding a significant decline in STARS ratings.
The analysts expect "decreased STARS ratings for 2026," estimating that around 25% of members will be in four-plus star plans.
While this will have a negative impact on earnings, Bernstein anticipates that pricing adjustments and member migration efforts could mitigate about two-thirds of the Medical Loss Ratio (MLR) impact. Consequently, they forecast a roughly 24% decline in adjusted earnings per share (EPS) for FY26.
As a result of these changes, Bernstein has lowered its price target for Humana to $308 from a previous $405. They have also reduced their target multiple to 16.0x next-twelve-month EPS, down from 18.0x, reflecting a delay in earnings recovery due to the STARS ratings issue.
Despite these challenges, the analysts' upgrade signifies a cautious optimism about Humana's potential moving forward.