Humana Earnings: Balanced Membership and Profit Growth Contribute to Higher 2023 Outlook

Narrow-moat Humana HUM turned in a strong start to the year and mildly increased its guidance for 2023. We have tinkered with our near-term assumptions a bit, but we are maintaining our $550 fair value estimate.

In the quarter, Humana’s strong annual election period in Medicare Advantage was on display, outpacing most of its peers. Part of this outperformance may relate to Humana’s strong MA Star Ratings scores, which were announced in October, and were much better than the other managed-care organizations that we cover, holding relatively steady at 96% of members expected to be in 4-star plans or better. This is versus a similar 97% last year while most other providers’ MA scoring percentages declined substantially. With these strong scores and other benefits likely attracting seniors when choosing their 2023 plans, Humana delivered 14% individual MA membership growth year over year relative to a weak 2022 period when Humana was more conservative with pricing, resulting in lower membership growth but stellar profit growth last year. In 2023, Humana aims to better balance MA membership and profit growth, and it appears to be doing well on that front, turning in 20% adjusted EPS growth in the first quarter.

On that strength, Humana slightly increased its 2023 outlook. Management now expects at least $28.25 of adjusted EPS (up from $28 previously) and representing growth of 12% year over year, or near the weak end of its long-term earnings growth target of 11% to 15%. Management also maintained its 2025 earnings target of $37 per share, which represents about 14% growth compounded annually from 2022 to 2025, or near the top of its long-term target. We are raising our 2023 assumptions a bit on the first quarter’s strong trends, and our longer-term estimates remain in line with management’s guidance. However, our fair value estimate has not changed materially, and shares appear about fairly valued, despite some of the industrywide MA headwinds expected to arise in 2024.