The surprise victory of Donald Trump as president is positive for the regulatory approval of the merger between Aetna Inc AET and Humana Inc HUM, as a Republican-led Department of Justice and FTC might be more willing to approve the deal based on the concessions and geographic divestitures offered by the two companies.
In this backdrop, Jefferies analyst David Windley laid out the following four scenarios for Humana under a Trump presidency.
Aetna Deal Closes
“Based on last night’s close, HUM shareholders would receive ~$229 in value – (0.8375 shares x AET price of $123.98) + $125/share in cash.”No Aetna Deal — Middle Case
“Without the deal, HUM management would execute Plan B. In the immediate term, this would include a sizeable share repurchase [...] We assume a total of $1.5 billion.”Humana would indulge in sizeable share repurchases. Windley models a share buyback of $1.5 billion, including $1 billion via accelerated share repurchase (ASR) and then continued buyback through 2018.
Windley noted that in this case, Medicare Advantage (MA) enrollment and revenue are impacted by lower Stars scores.
No Aetna Deal — Best Case
“Without the deal, we assume the same immediate share repurchase with slightly higher buying in 2018 and beyond.”Under this scenario, the analyst assumes the Trump administration moves Medicare more rapidly toward private plans, resulting in doubling MA industry enrollment over a handful of years. Further, Star score mitigation improves position to more than 60 percent of members in four-star plans.
The scenario also assumes Trump Administration moves to permanently remove the HIF (health insurer fee), adding $2.20 to recurring EPS.
No Aetna Deal — Worst Case
“In the worst case, HUM still repurchases $1.5 billion in stock in 2017; continuing amounts are lower in 2018 and beyond.”Under this scenario, there will be no improvement in rate environment, industry enrollment growth, or Humana’s Star scores and HIF returns in 2018.
The scenario also assumes Humana enrollment declines by about 2 percent. Margin deteriorates by 50 bps in ’18 from ’17.
Meanwhile, Humana believes it can deliver '17 enrollment growth in-line with '16 (3.5 percent) and margin should improve (modestly) from the low-4 percent in '16.
Further, Windley sees a meaningfully higher MA growth, driven by faster enrollments, a more favorable rate environment, and termination of the HIF.
Rating And Justification
The analyst maintains his Buy rating and raised his price target to $230 from $206.
“Improved '16 EPS, a likely more favorable MA environment, and Stars mitigation strategies significantly reduce downside risk, while the potential to double (or more) MA enrollment under a Ryan-type plan introduces a significant upside scenario,” Windley added.
At last check, shares of Humana were up 0.45 percent at $199.71. Aetna shares were up 0.25 percent at $123.90.
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