In The Wake Of Failed Merger With Aetna, Humana Regains Outperform Rating From Oppenheimer

The firm presented its updated thesis on Humana backed up by three factors:

• Belief that the company boasts a compelling growth opportunity in the increasingly appealing Medicare Advantage, or MA, market, buoyed by the Republican support.
• Opportunity to drive margins, especially if lawmakers repeal the HIF.
• Balance sheet strength that supports strategic deployment and returns of capital to shareholders.

Favorable Political Environment

Analysts Michael Wiederhorn, Matt Nirenberg and David Lager believe Humana will be one of the biggest beneficiaries of the changes in Washington, given its highest exposure to MA among public companies. The analysts see the Republican party's backing of the industry to benefit Humana through a more favorable reimbursement treatment and a longer-term shift toward MA over Fee-for-Service, or FFS.

Oppenheimer believes the company should have significant additional capital to deploy apart from the $2-billion stock buyback plan announced earlier.

Recapping Guidance, Raising Estimates

Delving on the 2017 guidance issued by Humana on February 14, Oppenheimer said the company expects adjusted earnings per share of $10.80–$11, excluding a $2.14 benefit from the HIF holiday. This, according to the firm, could represent a lever for future growth should lawmakers look again at a permanent repeal. The company also expects about 23 percent of the annual earnings to come in during the fourth quarter, the firm noted.

Accordingly, the firm raised its 2017 and 2018 earnings per share estimate to $10.89 and $11.92, respectively from $10.75 and $11.71.

Concluding Oppenheimer said, "Overall, we believe Humana is well positioned for growth, given the political support in Washington, ample strategic capital to deploy and the potential for upside to its current earnings base."

"Ultimately, this will also remain a desirable asset that could be acquired by another insurer."

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