Company Reports

We are reducing our fair value estimate to $425 per share from $473 previously on news that Humana's Medicare Advantage star ratings have dropped substantially, which will negatively affect marketing for 2025 plans and 2026 bonus payments. Given this development, management also stated that reaching its target operating margin of 3% in that business may prove difficult by 2027. With increasing uncertainty around its intermediate-term profit trajectory, we have raised our Uncertainty Rating to High from Medium previously. We also reduced our intermediate-term expectations for the firm based on these disclosures, but we still view shares as significantly undervalued with shares trading at just 14 times 2024 expected earnings, which are expected to decline about 40% on challenges in the Medicare Advantage market.

Humana remains a top-tier medical insurer and pays US caregivers to provide services through an integrated and value-based approach while also making the insurance experience easy to navigate for end users. Perhaps not surprisingly, given its founding as a nursing home in the 1960s, Humana places a special focus on serving elderly people, especially in its top-tier position in Medicare Advantage plans. Given US demographic trends and the increasing penetration of Medicare Advantage plans in the eligible population, Humana remains at the forefront of one of the fastest-growing areas in US medical insurance.

Managed-care organizations face significant regulatory risks that often crop up during election cycles and keep all our MCO moat ratings at narrow. Fortunately for MCO investors, the near-term regulatory risks of this election cycle look manageable, in our opinion, despite current pockets of weakness in Medicare Advantage, Medicaid, and pharmacy benefit management. Some of these near-term regulatory risks are even creating opportunities for long-term MCO investors. For example, our Best Idea in the industry is Humana, which continues to face uncertainty around its intermediate-term profit trajectory in the highly regulated Medicare Advantage market. Medicaid and individual plan leader Centene also looks undervalued while CVS' problems in Medicare Advantage and PBM transparency concerns keep its shares deeply discounted. Cigna, Elevance, and UnitedHealth shares look fairly valued to us.

We are keeping our $473 fair value estimate intact after narrow-moat Humana delivered a strong quarter. However, with robust medical utilization trends, management did not alter its 2024 guidance and gave limited insights to its 2025 outlook beyond expected profit growth on a multiyear trajectory toward its 3% target operating margin in Medicare Advantage. Overall, uncertainty surrounds Humana's near-term prospects, but we still have a solid view of its long-term opportunities. We think that Humana shares remain attractively valued.

Humana shares are trading well below our $473 fair value estimate after concerns about the company's Medicare Advantage stronghold emerged in recent months. We still view Humana as a top-tier managed care organization with a narrow economic moat built on cost advantages and network effects primarily in its MA-focused operations. Despite near-term challenges in this market that have pushed down its 2024 profit outlook, we still view the MA end market as attractive for MCOs in the long run, and Humana looks likely to pull several levers to gradually improve its MA profitability, starting in 2025.

We are keeping our $473 fair value estimate intact after narrow-moat Humana reported a strong start to 2024, as timing in administrative expenses helped the firm outperform expectations even with more conservative reserving due to the Change disruption on claims processing. Considering those factors, management did not alter its 2024 guidance and actually pulled its outlook for 2025 on the weak final rate notice for Medicare Advantage given by the Centers for Medicare & Medicaid Services in early April. Uncertainty surrounds Humana's near-term prospects, but we still have a solid view of its long-term opportunities. This view boosts our belief that Humana shares remain attractively valued.

Humana remains a top-tier medical insurer and pays US caregivers to provide services through an integrated and value-based approach while also making the insurance experience easy to navigate for end users. Perhaps not surprisingly, given its founding as a nursing home in the 1960s, Humana places a special focus on serving elderly people, especially in its top-tier position in Medicare Advantage plans. Given US demographic trends and the increasing penetration of Medicare Advantage plans in the eligible population, Humana remains at the forefront of one of the fastest-growing areas in US medical insurance.

In an unusual development, the Centers for Medicare & Medicaid Services released its final Medicare Advantage, or MA, rate notice that matched its initial rate notice, instead of rising. In this final rate notice, the overall increase in MA revenue to insurers remained lower than the risk score trend, which is likely to pressure MA benefits, pricing, and/or insurer profits in 2025. We are reducing our fair value estimate on Humana by 5% on this disappointing development, given its focus on MA and our expectation that its previous profit goal in 2025 and potential growth in subsequent years may be constrained. However, we are not changing our fair value estimates on the other more diverse managed care organizations, or MCOs, that we cover, and market price declines on this news may create more attractive investment opportunities for investors with a long-term investment horizon. Currently, Humana, CVS, and Centene remain the most attractive MCOs on a price/fair value basis.

Humana is a top-tier medical insurer and pays U.S. caregivers to provide services through an integrated and value-based approach while also making the insurance experience easy to navigate for end users. Perhaps not surprisingly, given its founding as a nursing home in the 1960s, Humana places a special focus on serving elderly people, especially in its top-tier position in Medicare Advantage plans. Given U.S. demographic trends and the increasing penetration of Medicare Advantage plans in the eligible population, Humana remains at the forefront of one of the fastest-growing areas in U.S. medical insurance.

After giving a disappointing preliminary view of key 2023-24 operating metrics last week, narrow-moat Humana gave a much weaker 2024 and 2025 outlook than we anticipated. We are lowering our fair value estimate to $500 per share from $550 previously to reflect this weak profit trajectory in Humana's core end market—Medicare Advantage, or MA. We have also lowered our Capital Allocation Rating to Standard from Exemplary previously to reflect the role that weak execution played in the mispricing of Humana's MA plans. Even with our changed thinking on those issues, we still recognize the strong franchise and opportunities ahead of Humana, and we view currently discounted shares as a unique opportunity to invest in both quality and value in managed care.

Humana is a top-tier medical insurer and pays U.S. caregivers to provide services through an integrated and value-based approach while also making the insurance experience easy to navigate for end users. Perhaps not surprisingly, given its founding as a nursing home in the 1960s, Humana places a special focus on serving elderly people, especially in its top-tier position in Medicare Advantage plans. Given U.S. demographic trends and the increasing penetration of Medicare Advantage plans in the eligible population, Humana remains at the forefront of one of the fastest-growing areas in U.S. medical insurance.

Narrow-moat Humana gave a preliminary look at 2023-24 operating metrics that was weaker than we anticipated on increasing medical utilization and a tougher landscape for adding new Medicare Advantage, or MA, members in 2024, which compressed both the industry's (3%) and Humana's MA membership growth (2% for individuals) for 2024. Even when adjusting for this weaker near-term outlook, we do not expect Humana's $550 fair value estimate to change materially, considering cash flows likely generated since our last valuation update in early 2023. Overall, we think long-term investors should consider declining shares as an even bigger opportunity to invest in this top-tier managed-care organization, or MCO, which was trading at a nearly 20% discount to fair value prior to this news.

After merger rumors surrounded narrow-moat Cigna and Humana in recent weeks, Cigna announced other capital allocation priorities that look more appropriate to us, especially given antitrust concerns that likely would have surrounded the pharmacy benefit management part of the rumored combination. We are keeping our fair value estimates for both organizations intact. Following their decline since deal rumors were highlighted a couple of weeks ago, Cigna's shares look especially attractive relative to our fair value estimate.

The Wall Street Journal has reported that two of the major managed-care organizations that we cover—Cigna and Humana—are in merger talks that could be completed by the end of this year. Both Cigna and Humana have narrow moats surrounding their businesses, which primarily consist of medical insurance, pharmacy benefit management, or PBM, and healthcare service operations. Given how speculative this potential deal is at this stage and the antitrust concerns that would likely surround this combination, we are not changing our fair value estimates on either firm.

Narrow-moat Humana turned in strong third-quarter results and maintained its near- and intermediate-term outlook, despite growing challenges such as increasing medical utilization in its core Medicare market. Given the stable outlook, our $550 fair value estimate does not look likely to change materially at first glance.

In advance of the Medicare open enrollment period that starts on Oct. 15, the Centers for Medicare & Medicaid Services, or CMS, released its star ratings that measure the performance of the Medicare Advantage, or MA, plans offered by private insurers. At first glance, we do not anticipate changing our fair value estimates for any managed-care organization, or MCO, based on this new data. However, even as overall MA star ratings largely stabilized after a big drop last year, there were some clear winners and losers in this year's scoring that could affect market sentiment for MCO shares.

Near-term uncertainty is creating an opportunity for long-term investors in the managed-care organization segment. Of the six narrow-moat MCO stocks that we cover—Centene, Cigna, CVS Health, Elevance, Humana, and UnitedHealth—five are trading in undervalued territory, and even the typically premium-priced UnitedHealth looks reasonably valued to us.

Humana is a top-tier medical insurer and pays U.S. caregivers to provide services through an integrated and value-based approach while also making the insurance experience easy to navigate for end users. Perhaps not surprisingly, given its founding as a nursing home in the 1960s, Humana places a special focus on serving elderly people, especially in its top-tier position in Medicare Advantage plans. Given U.S. demographic trends and the increasing penetration of Medicare Advantage plans in the eligible population, Humana remains at the forefront of one of the fastest-growing areas in U.S. medical insurance.

Blue Shield of California announced that it was dropping CVS Health for its nonspecialty pharmacy benefit management services in favor of a coalition of providers, including Amazon and the Mark Cuban Cost Plus Drug Company. While these organizations have been making noise as potential PBM entrants for a while, this contract win looks like the first one with any real teeth, in our opinion, and could signal the start of a change in the PBM competitive landscape, particularly for top-tier players CVS, Cigna, and UnitedHealth. We do not expect to change our narrow moat ratings on these MCOs because of this announcement, though.

Narrow-moat Humana turned in strong second-quarter results, and despite growing challenges such as increasing medical utilization in its core Medicare market, the company maintained its near- and longer-term outlook. Given that stability, our $550 fair value estimate does not look likely to change materially at first glance.