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Humana Inc Earnings Report Didn’t Answer the Right Questions

The health insurer more or less has the right idea, but what that means to investors remains unclear

If you don’t like the quarterly earnings report Humana Inc (NYSE:HUM) posted on Wednesday morning, just look at it from a different angle. That is to say, if the revenue shortfall is a turn-off, the fact the profits rolled in better than expected may put Humana stock in a more bullish light.

Humana Inc Earnings Report Didn't Answer the Right Questions
Source: Shutterstock

Just for the record though, the fact that HUM stock was down a bit more than 1% in Wednesday’s early trading action suggests investors see the glass as half-empty rather than half-full.

Maybe that’s the right call. Then again, it would be naive to think the HUM stock investors know today will be the same Humana a couple of years from now… for better or worse.

Humana Earnings Recap

For its fourth fiscal quarter ending in December, health insurer Humana turned $13.19 billion worth of revenue into an operating profit of $2.06 per share. The bottom line was better than the earnings of $2 per share of HUM stock analysts had been modeling, though the top line just missed estimates of $13.2 billion.

A comparison to year-ago numbers would mean little. The company turned in an operating profit of $2.34 per share and $12.88 billion in revenue, but ever-changing service offerings (geographically and demographically) make such comparisons somewhat unfair. To that end, its Medicare Advantage programs — which collectively cover about a third of the nation’s Medicare participants — did particularly well last quarter as the nation’s health insurance landscape continues to change.

Also bolstering the bottom line is the sheer fact that Humana is spending less on claims. In the same quarter a year earlier, more than 89% of its revenue was used to help pay patients’ medical bills. Last quarter, only 83% was passed along to care providers. It’s a figure that may not be sustainable.

CEO Bruce Broussard said of last quarter’s results,

“We continue to make strong progress in advancing our integrated care strategy, especially in deepening our clinical capabilities through long-term platform investments in the home and primary care. And our focus on and commitment to improving the member experience continue to pay off as we this year saw significant improvement in our Stars results as well as our Net Promoter Scores which increased by 500 basis points.”

Moving Target

For the fiscal year that just began, Humana anticipates earnings of between $13.50 and $14.00 per share, up from 2017’s $11.71. Analysts had only been modeling a profit of $13.12 per share of Humana stock, though some calculations suggest an even smaller figure had been expected for 2018.

The weakness from HUM stock on Wednesday may ultimately reflect the realization that nobody can successfully predict what even the near-term future holds.

Yes, legislative action is one threat. President Donald Trump and some key members of the GOP have been working to dismantle the Affordable Care Act, which has proven problematic in its own right. It was crumbling on its own, and though the ACA wasn’t repealed last year, it was effectively negated when it eliminated the mandate that everyone living in the United States must purchase health insurance.

The uncertainty stems far beyond legislative changes though. Late last month, e-commerce giant Amazon.com, Inc. (NASDAQ:AMZN), conglomerate Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B) and bank JPMorgan Chase & Co. (NYSE:JPM) teamed up to lay the groundwork for establishing its own healthcare company designed to lower the company’s respective costs for providing health insurance to their employees. It’s an initiative that takes dead aim at health insurers like Humana, which have had little incentive to keep customer costs low.

The irony? Several days before Amazon, JPMorgan and Berkshire made their announcement, Broussard acknowledged that the next evolution of the healthcare business would be one that focuses on affordability rather than mere coverage. Vertical integration was at least one step in that direction.

Broussard brought the idea up again in the quarterly report.

Bottom Line for Humana Stock

Investors aren’t balking today because they don’t think Humana has a place in the future of healthcare. Humana stock is retreating just a bit on Wednesday because it’s not exactly clear what its role will be now that large organizations have taken it upon themselves to do what Humana is supposed to be doing. The company vaguely nodded in the direction it was going, but didn’t offer much in the way of compelling specifics.

Throw in the fact that healthcare and insurance legislation is an outright wild card right now, and it’s not surprising investors don’t want to dig in too deep with any health insurer.

It may be a hint worth taking.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.

Article printed from InvestorPlace Media, https://investorplace.com/2018/02/humana-inc-earnings-report-didnt-answer-all-the-right-questions/.

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