Medicare Advantage Expansion And AI Innovations Propel Revenue And Margin Growth

Key Takeaways

• Humana's strategic investments in clinical excellence and technology aim to reduce medical costs and enhance long-term net margins.
  
• Expansion of primary care clinics and Medicare Advantage growth are expected to bolster patient numbers and drive revenue and earnings growth.
  
• Regulatory uncertainties, competitive pressures, and investment needs may strain profits, membership growth, and margins, impacting long-term financial stability and revenue potential.

Catalysts

Provides medical and specialty insurance products in the United States.

• Humana's Medicare Advantage (MA) membership growth has been outpacing expectations, with anticipated year-over-year growth of around 5%, attributed to disciplined product pricing and incremental marketing investments in internal sales channels. This is likely to positively impact revenue growth.
  
• The company is aggressively investing in clinical excellence, including aligning incentives and making technology investments to improve care management and member outreach. These initiatives are expected to lower medical costs and enhance net margins over time.
  
• Humana is focused on operating with back-office efficiency, with expectations of a 30 basis point decrease in adjusted operating cost ratio through the implementation of AI solutions. This is anticipated to enhance net margins.
  
• Humana is expanding its primary care clinics with plans to add around 40 new clinics, aimed at increasing patient growth and improving financial and clinical targets. This strategic expansion is expected to drive revenue and earnings growth.
  
• Investments in the Stars program to improve ratings and maintain 4-Star contracts are geared toward supporting long-term earnings potential by ensuring higher bonus revenue, which in turn is expected to impact revenue positively by 2027.

Humana Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Humana's revenue will grow by 2.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.2% today to 1.9% in 3 years time.
• Analysts expect earnings to reach $2.3 billion (and earnings per share of $21.32) by about November 2027, up from $1.4 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.9x on those 2027 earnings, down from 25.6x today. This future PE is lower than the current PE for the US Healthcare industry at 24.8x.
• Analysts expect the number of shares outstanding to decline by 3.36% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.05%, as per the Simply Wall St company report.

Humana Future Earnings Per Share Growth

Risks

• Uncertainty regarding the outcome of the Stars appeal and the need for significant investment in performance improvement could lead to increased costs, impacting net margins and EPS.
  
• The ongoing costs and potential inefficiencies related to addressing clinical excellence and operational challenges, such as rising specialty drug costs and call center metrics, may affect the overall profitability and net margins.
  
• The anticipated industry-wide regulatory and reimbursement changes, such as the IRA and V28 impacts, may introduce additional headwinds to revenue and operating margins, especially without sufficient risk adjustment.
  
• Continued pressure from competitive dynamics and necessary plan exits could reduce membership growth, leading to lower revenue potential in the short to medium term.
  
• Risks associated with Medicare Advantage's enrollment changes and retention issues, influenced by redeterminations and plan competition, could lead to fluctuations in revenue and earnings.

Valuation

• The analysts have a consensus price target of $286.9 for Humana based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $425.0, and the most bearish reporting a price target of just $248.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $123.3 billion, earnings will come to $2.3 billion, and it would be trading on a PE ratio of 15.9x, assuming you use a discount rate of 6.0%.
  
• Given the current share price of $289.42, the analyst's price target of $286.9 is 0.9% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.