Credit Suisse: Growing Enrollment, 2019 Tailwinds For Humana Justify Bullish Stance

Projected 2019 tailwinds led Credit Suisse to upgrade Humana Inc HUM after the health insurer released a beat-and-raise fourth-quarter report Wednesday.

The Analyst

Credit Suisse analyst A.J. Rice upgraded shares of Humana from Neutral to Outperform and increased the price target from $259 to $306.

The Thesis

After ceding market share for several years, Humana is expected to grow enrollment in its individual Medicare Advantage business in line with the industry growth rate of 7-7.5 percent, Rice said in a Thursday note. Individual MA business accounts for about 61 percent of Humana's revenues, the analyst said. 

Thanks to a favorable MA rate update, stable year-over-year benefits, the health insurer fee moratorium and tax legislation that provides strong financial flexibility, Rice said he expects the company to return to above-market individual MA enrollment growth in 2019.

Humana's pre-tax margin could drop from 5 percent in 2017 to a low 3 percent in 2018 due to the reinvestment of a portion of its 2017 outperformance, incremental enrollment that carries a lower margin and elevated flu in the first quarter of 2018. But the analyst expects most of the 2018 headwinds to transform into tailwinds in 2019.

"HUM will have $1.75-$1.80/share of incremental tailwind related to the tax portion of the HIF moratorium-related benefit in 2019, of which we estimate the company lets roughly 85 cents fall through to the bottom line," Rice said. 

Credit Suisse increased its 2018 and 2019 EPS estimates by $2 and $3.25, respectively, to $14 and $17.

The Price Action

Humana shares are up about 38 percent over the past year.

At the time of publication, shares were down 0.60 percent at $263.16. 

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Posted In: A.J. RiceCredit SuisseHealth InsurancemedicareAnalyst ColorUpgradesPrice TargetAnalyst Ratings