I think most of us would agree that our health care system is far from perfect. Employee coverage is declining, independent insurance is prohibitively expensive and physician and drug costs are rising at rates much greater than inflation.
Light a match and the whole system is likely go up in flames.
Thankfully, health care is now at the front and center of the political debate as the U.S. contemplates the merits of the two Presidential candidates and their plans to care for the health of the nation. The outcome of the election will weigh heavily on the entire issue. No matter who voters choose to elect this November, health insurance companies will be an integral part of the solution (see also, “The Real Issues of This Election“).
One of the leaders in health care coverage is Humana (HUM). Humana provides benefit plans for both employers, individuals, government workers and Medicare and Medicaid recipients. Humana’s health care plans included 11.5 medical benefit program members and 6.8 million specialty product program members.
Earlier this year, HUM shocked the market by announcing that it was reducing its profit expectations for 2008, due to an error in designing benefits for one of its Medicare drug programs. Even though Humana stated that the error would be confined to 2008 results, the market reacted harshly. Shares fell hard on the news and still trade for less than 40% since the start of the year (another example of the stock market acting inefficiently in my opinion).
On The Mend
Yesterday, Humana released 2nd quarter earnings that handily beat Wall Street estimates. The company made $1.24 in the quarter which and beyond was above the estimated $1.18. For the year, HUM now expects $4.30 – $4.40 as opposed to a prior range of $4.10 – $4.35.
I can appreciate the market missing the boat on an overly conservative management team, but I cannot forgive the blatant ignoring of the long term appreciation. Management has stated that the program errors would only be a one year event, one that could–and would–be fixed.
Apparently analysts have also overlooked the fact that Humana plans on buying Tennessee health-benefits firm Cariten Healthcare from Covenant Health–a $245 million cash deal that won’t affect 2008 earnings guidance.
The market’s over reaction provides an excellent buying opportunity for investors. Those who speculated on the long side are now being handsomely rewarded.
While weakness in the current economy, combined with rising prices for services may negatively impact profit margins, HUM still trades well below levels prior to the reduction in profit estimates. Given the expectation for increasing health coverage needs, I would view HUM as a growth story trading at a value. There is still plenty of room for this stock to reach previous highs and beyond.
This article was written by Jamie Dlugosch, contributing editor to InvestorPlace Media. For more actionable insights like this, go to www.InvestorPlace.com.
