Humana (HUM) can offer long-term returns despite high valuation

There has been a marked decrese in the number of people seeking healthcare services since the virus outbreak but most healthcare firms had a busy first half, serving the affected communities and assisting the authorities in their pandemic relief efforts. Health insurance providers like Humana, Inc. (NYSE: HUM) see steady growth in their business even as healthcare costs continue to rise and the older population grows rapidly.

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Read management/analysts’ comments on quarterly results

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Investing in HUM

Humana’s stock got a major boost in the final months of last year and carried forward the momentum into the current year. Though the shares are in a soft patch currently, experts predict handsome gains in the next twelve months. The majority of analysts have assigned the stock buy rating. Prospective investors might get discouraged by the high valuation — with some market watches warning that the stock is already at its peak — but its promising prospects can’t be missed. Going by the strong fundamentals and impressive past performance, Humana looks relatively less risky.

The Louisville-based company, which has consistently generated shareholder value in the past, is profitable and stays on the growth path. Unlike the Wall Street firms that resorted to right-sizing when challenged by the slowdown, Humana is busy hiring in order to take forward its COVID relief activities. One of the factors the company is looking to leverage is the prospects of providing holistic care to patients under the Medicare Advantage plan. Interestingly, Medicare Advantage enrolments more than doubled in the past ten years, underscoring its popularity among senior citizens.

What’s in Store?

There is uncertainty over the future of the sector as people continue to stay away from healthcare facilities and postpone non-emergency medical procedures, concerned about the high rate of virus infection. Meanwhile, the resultant decline in medical costs for the insurance segment would catalyze Human’s bottom-line growth in the near future. The company can expect to return to the pre-crisis levels as the improvements in macroeconomic conditions bring back normalcy to the market.

“In July, the non-COVID in-patient utilization remained flat to June, but COVID testing and treatment costs were a bit higher than the modest cost we saw through June given the recent increase of cases in certain geographic hotspots. We expect non-COVID medical utilization to begin to approach normal levels as the year progresses and potentially run slightly above normal later in the year,” said Humana’s CFO Brian Kane during last month’s post-earnings interaction with analysts.

Earnings Jump

Earnings, on an adjusted basis, more than doubled to $12.56 per share in the June-quarter when revenues rose 17% to $19 billion, aided by higher premiums and an increase in state-based contracts membership. The impact of deferrals in patient-visits, due to the shelter-in-home orders and other virus-related disruptions, was more than offset by the COVID-19 testing and treatment efforts.

While acknowledging the uncertainty surrounding the pandemic in the second half, the management revised up its outlook for full-year Medicare Advantage membership growth and reaffirmed the earnings projection. It is expected that the impact of recent investments in marketing activities and support initiatives for members would reflect in the company’s financial performance in the back half of the year.

In Expansion Mode

As part of diversifying its offerings, Humana recently introduced two value-based programs for specialty care — a heart bypass surgery called Coronary Artery Bypass Grafting and Total Shoulder Specialist Rewards Program, an orthopedic specialty care for shoulder replacement procedures. In July, the company invested $100 million in Heal, a telehealth startup, to expand its footprint into new markets.

Also read: Humana Q2 2020 Earnings Call Transcript

Earlier this month, Humana’s stock jumped to an all-time but pulled back slightly later and hovered near the $400 mark. The shares traded higher early Tuesday but ended the session down 1%.