Last Update18 Oct 25Fair value Increased 0.57%
Humana’s analyst price target increased slightly to $294.54 from $292.87. Analysts cite improved earnings visibility and the stability of Medicare Advantage star ratings as supporting factors for the upward revision.
Analyst Commentary
Recent analyst updates highlight a mixture of optimism and caution regarding Humana’s prospects and valuation within the managed care sector. The complexity of the Medicare Advantage space, along with evolving star ratings and regulatory hurdles, has shaped differing perspectives on the company’s near- and medium-term outlook.
Bullish Takeaways
- Several price target increases reflect improved earnings visibility as Humana’s management demonstrates confidence in navigating key sector issues and emphasizes progress on internal performance indicators.
- Bullish analysts see positive implications for Humana’s valuation as star ratings stabilize. A considerable portion of members are enrolled in high-rated plans, helping to support future growth and bonuses in the coming years.
- Some analysts believe recent share price pullbacks may present attractive entry points, citing relatively low implied earnings multiples compared to sector peers and anticipated improvements in sector sentiment.
- Management’s focus on diversifying product offerings, including expanding into additional plan types, is regarded as a strategic move to reduce risk tied to specific contracts or ratings outcomes.
Bearish Takeaways
- Some bearish analysts point to the most significant underwriting downturn in over 15 years for the managed care industry. They cite a longer pathway to recovery in key markets such as Medicaid and healthcare exchanges.
- There are concerns that efforts to diversify could lead to adverse selection, particularly if Humana grows membership faster than the market average in less profitable areas recently exited by competitors.
- Uncertainties remain regarding upcoming Medicare Advantage rate announcements and the impact of tightening star ratings. Both of these factors could pressure near-term earnings growth and delay a sector rebound.
- The legal victory regarding procedural challenges to regulatory changes allays some immediate concerns, but questions persist about the long-term resolution of regulatory scrutiny and its financial implications.
What's in the News
- Humana lost a second lawsuit seeking to overturn federal cuts to Medicare bonus payments. A Texas judge ruled in favor of the government and solidified a downgrade in quality ratings tied to billions in potential revenue. (Bloomberg)
- Ongoing government negotiations may impact ACA health-insurance subsidies, which are central to efforts to resolve a U.S. government shutdown. Humana is among several companies affected by these subsidy decisions. (Wall Street Journal)
- U.S. judges in Texas and Connecticut rejected challenges to the constitutionality of the Medicare Drug Price Negotiation Program. This reinforces regulatory changes that will impact Humana and peers across the healthcare industry. (The Hill)
- Humana is facing increasing legal pressure as the American Physical Therapy Association joined a federal antitrust lawsuit accusing major insurers, including Humana, of conspiracy to underpay healthcare providers for out-of-network services. (Key Developments)
Valuation Changes
- Consensus Analyst Price Target has risen slightly to $294.54 from $292.87, reflecting a marginal improvement in perceived fair value.
- Discount Rate remains unchanged at 6.78%, indicating no adjustment in the risk assumptions applied by analysts.
- Revenue Growth projections have edged up to 7.42% from 7.39%, pointing to mildly increased expectations for top-line expansion.
- Net Profit Margin is virtually unchanged, moving narrowly lower to 2.16% from 2.16%.
- Future P/E ratio estimate has increased slightly to 13.0x from 12.9x, implying a modestly higher valuation relative to expected future earnings.
Key Takeaways
- Enhanced AI use improves customer interactions and operational efficiency, potentially benefiting net margins and reducing costs.
- Strategic acquisitions and focus on clinical excellence boost growth in primary care, improve quality outcomes, and support revenue increase.
- Uncertainty around regulatory impacts and operational efficiency challenges could pressure Humana's margins and growth, necessitating strategic alignment to mitigate risks.
Catalysts
About Humana- Provides medical and specialty insurance products in the United States.
- Humana is focusing on operational efficiency by increasing the use of AI in its contact centers to enhance customer interactions and reduce costs, likely impacting net margins.
- The company is making substantial efforts to improve clinical excellence, including medication adherence campaigns and member engagement through in-home visits combined with virtual health, which is expected to enhance medical margins and member experience.
- Growth in value-based models, particularly through the expansion of CenterWell and Medicaid services, is contributing to robust year-over-year patient and membership growth, indicating a potential increase in revenue.
- Humana’s strategic capital allocation, including the acquisition of 30 new centers, is expected to fuel growth in primary care, impacting revenue and operational scalability.
- The progress in closing gaps in care and achieving high Stars ratings is targeted to deliver sustainable clinical outcomes and boost quality, contributing positively to future earnings and competitive stability.
Humana Future Earnings and Revenue Growth
Assumptions
How have these above catalysts been quantified?- Analysts are assuming Humana's revenue will grow by 7.0% annually over the next 3 years.
- Analysts assume that profit margins will increase from 1.3% today to 2.2% in 3 years time.
- Analysts expect earnings to reach $3.3 billion (and earnings per share of $26.27) by about September 2028, up from $1.6 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 13.2x on those 2028 earnings, down from 20.8x today. This future PE is lower than the current PE for the US Healthcare industry at 21.0x.
- Analysts expect the number of shares outstanding to decline by 0.12% per year for the next 3 years.
- To value all of this in today's terms, we will use a discount rate of 6.78%, as per the Simply Wall St company report.
Humana Future Earnings Per Share Growth
Risks
What could happen that would invalidate this narrative?- Humana's performance is influenced by the Medicare Advantage (MA) Stars program, and uncertainties around litigation related to CMS' 2026 Star ratings could affect profitability and growth projections, impacting earnings.
- Timing-related outperformance and administrative cost expectations shifting to later quarters could potentially affect operational efficiency and net margins if not managed accurately.
- The impact of MACRA's V28 coding changes and its disproportionate effect on higher-acuity patients could pressure the company's medical cost ratio and affect overall margin if not successfully mitigated.
- Ongoing integration and earnings realization in the Medicaid and CenterWell business segments are essential, and any delays or inefficiencies in these objectives could impact revenue growth and net earnings.
- External factors such as changes in reimbursement rates, regulatory pressure, or shifts in consumer behavior influenced by the Inflation Reduction Act (IRA) may present risks to revenue streams and profitability if not well aligned with the company's operational and strategic plans.
Valuation
How have all the factors above been brought together to estimate a fair value?- The analysts have a consensus price target of $298.955 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 $353.0, and the most bearish reporting a price target of just $250.0.
- In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $150.9 billion, earnings will come to $3.3 billion, and it would be trading on a PE ratio of 13.2x, assuming you use a discount rate of 6.8%.
- Given the current share price of $273.02, the analyst price target of $298.95 is 8.7% higher. 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.
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Disclaimer
AnalystConsensusTarget is a tool utilizing a Large Language Model (LLM) that ingests data on consensus price targets, forecasted revenue and earnings figures, as well as the transcripts of earnings calls to produce qualitative analysis. The narratives produced by AnalystConsensusTarget are general in nature and are based solely on analyst data and publicly-available material published by the respective companies. These scenarios are not indicative of the company's future performance and are exploratory in nature. Simply Wall St has no position in the company(s) mentioned. Simply Wall St may provide the securities issuer or related entities with website advertising services for a fee, on an arm's length basis. These relationships have no impact on the way we conduct our business, the content we host, or how our content is served to users. The price targets and estimates used are consensus data, and do not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that AnalystConsensusTarget's analysis may not factor in the latest price-sensitive company announcements or qualitative material.
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