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Humana Defy Market to Hit a New High. How Did America's Health-Care Giant, 25 Times Bigger In 25 Years, Get Through Economic Bull and Bear?

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Wise Shark joined discussion · Sep 21, 2022 04:17
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$Humana(HUM.US)$ hit an all-time high. Founded in 1961, Humana is an American health insurance giant that offers a wide range of health and wellness plans, including medical insurance, group life insurance, and dental insurance, to more than 11 million customers across the United States. Then, as a huge health care giant, why has it been able to lead the market for more than 20 years, and its stock price shape is also a perfect 5 times in 10 years, what is the secret to supporting its growing stock price and performance? (9.20 close: $502.89)
Humana Defy Market to Hit a New High. How Did America's Health-Care Giant, 25 Times Bigger In 25 Years, Get Through Economic Bull and Bear?
Logic From Jefferies:
Mgmt asserted a strong earnings outlook, committing to ~14%+ EPS growth to '25 and beyond. Revenue drives >2/3s of that, a benefit of HUM's over weighting to MA (~90% of EPS). The primary care strategy should add 3%/year in the mid and long-term. If the day had a soft data point, it was '23 MA member growth not up to industry average. That seems conservative, given the magnitude of investment... certainly mgmt doesn't want to cut that again. Raising PT to $580.
Mid-Term Guidance Suggests High Confidence In Durability of Growth Opps. Mgmt committed to a 14% EPS CAGR from '23-'25, top-ending the existing long-term +11-15% EPS CAGR framework. '23 EPS growth is likely to start below the midpoint (but could rise thru the year) before accelerating in '24 and '25. Combined with commentary that EPS growth "in '26 and beyond" should meet or exceed the 14% CAGR mid-term guidance, mgmt cemented its positive take on the MA opp (discussed below). Mgmt is moving away from providing MA margins, instead pointing to three KPIs: membership growth, operating leverage, and cap deployment, in addition to periodic updates on the mix of HUM lives, center profitability, and M&A.
Branch:Observations On the CenterWell (MA) Forecasts. With 222 centers today, +20 over the balance of '22, and 50/yr during '23-'25 would yield 392 centers, short of the 400-450 forecast. Larger M&A than advertised could be on the cards. However, we don't believe reaching 400-450 centers is required to hit the expected $100M-$200M in EBITDA contribution by 2025. If de novo centers follow the J-curve presented by mgmt, reflecting actual results in the existing portfolio, we estimate $100M of EBITDA/$0.65c of EPS upside (~2% of our est.) to the midpoint of '25 guidance. As for implied Medicare rate increases, we calculate HUM is using +3% p.a. by calculating $12.8k/pt in '21 to $14.4k/pt in '25, which is reasonable to conservative based on the last several years' experience.
Bold Actions Taken To Solve '22 MA Enrollment Challenges. Mgmt did not commit to hitting MA industry enrollment growth in '23, which could disappoint some investors. To fix the problem, HUM is making meaningful investments, both short- and long-term in nature, for D-SNPs and nonduals in addition to dental benefits. Structurally, HUM is lessening its exposure to the channel by improving the marketing and internal sales engine. While confident the aggressive investment into plan value can stabilize MA growth, mgmt is understandably hesitant to claim victory before full competitive intel is gathered.
Basic Case Estimation and Hypothesis
• 1.MA enrollment grows ~4% in FY22, M/HSD in '23
• 2.HUM not materially impacted by recession (business mix)
• 3.Mgt's $0.50/share COVID cushion for 2H22 is sufficient
• 4.Retail margins modestly expand further in FY23
• 5.Caid enrollment falls M/HSD due to redeterminations
• 6.Part D enrollment remains under pressure, falls in FY22
• 7.2023E EPS: $28.06; ~20.7x target multiple; PT: $580
Basic, Upside, and Downside Case Price movement
Basic, Upside, and Downside Case Price movement
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