2 Analysts Diverge On Humana Inc. Recommendations

Medicare's expected enrollment growth of 50 percent in the next 15 years makes Humana Inc HUM a glittering prize in the health insurance industry.

Humana, which gets about 85 percent of its premiums from Medicare Advantage programs, is fielding bids from Aetna Inc AET, CIGNA Corporation CI and Anthem Inc ANTM according to multiple unconfirmed reports Friday.

Humana gained about 20 percent on the reports, and traded recently at $214.51, up $0.18.

Related Link: Humana Reportedly Considering Sale Of Company

Cantor Fitzgerald

Joseph D. France of Cantor Fitzgerald maintained a Buy rating on Humana Monday, raising his target by more than 50 percent to $230 a share, citing Humana's focus on Medicare and reported merger interest.

Morgan Stanley

But Morgan Stanley's Andrew Schenker reiterated an Equal Weight rating on Humana.

At Humana's Friday closing price of $214.60, a 5 percent takeover premium "would represent one of the highest P/E multiples we've seen" in the segment, Schenker said.

A potential Humana acquisition is perhaps comparable to Cigna's 2011 $3.8 billion purchase of HealthSpring at a 40 percent premium, according to Schenker.

Cigna's bid equaled about 13.2 times HealthSpring's earnings, according to Schenker.

A 5 percent premium to Humana's closing price Friday would equal about 23.2 times its earnings, Schenker said.

Other premiums paid in large health insurer acquisitions have ranged from 9 percent to 43 percent over the past 10 years, according to Schenker.

An acquisition of Humana could boost 2017 earnings of either Aetna and Anthem by more than 10 percent, according to Schenker.

But if Cigna acquired Humana, its 2017 profit would rise by only about 1 percent, "making it less attractive," according to Schenker.

Humana and UnitedHealth Group Inc. UNH are the largest players in the Medicare segment, with about 3.2 million Medicare Advantage members each.

"Both companies are well-positioned" in the segment, according to France, but he noted that UnitedHealth derives only about 40 percent of its premiums from Medicare.

A Look At Past Health Insurer Acquisitions

Schenker said take out premiums for large health insurer acquisitions have ranged from 9 percent to 43 percent over the past ten years.

For the last five, large deals have ranged from just 9 percent on the low end for Anthem's acquisition of Well Choice in 2005 to 43 percent on the high end for Anthem's acquisition of Amerigroup in 2012.

Aetna would fund the deal with 31 percent debt, while Cigna and Anthem would only use 29 percent debt.

Related Link: Public Domain