About Humana
Humana recently caught my attention for a few different reasons.
For starters, it is a seasoned legacy health insurance company that’s share price has nosedived over the last few months (zooming out, down around 40% over the last one year’s span of time), perhaps presenting an excellent entry point, not to mention that it was recently in merger talks with yet another giant in the space by the name of Cigna (but those talks have subsequently gone nowhere due to pricing disagreements and it is really difficult for me to imagine the Federal Trade Commission or the Department of Justice signing off on such a potentially anti-competitive merger) and, well, if I were a member of the military I would go by Major Nerd because one of my favorite pastimes is looking through hedge fund filings (I have my favorites, of course), and one of the funds that I enjoy checking out every 45 days is that of Lee Ainslie’s Maverick Capital (headquartered in where else but Dallas, Texas), and he just happens to dedicate (as of his most recently filed 13F, that is) nearly 1% of his firm’s entire portfolio to Humana (NYSE: HUM).
I seriously need a life.
At any rate, if you didn’t know have any ideas by now, Louisville, Kentucky-headquartered Humana is one of the world’s largest health insurance companies, serving some other pretty large, global enterprises such as Walmart, The Home Depot, Lowe’s, Kroger, FedEx, Amazon, General Electric, PepsiCo, The Coca-Cola Company and many, many others, including non-enterprise clients such as municipalities, governments, individuals and other organizations and entities as well.
Like any other insurance company that we’ve analyzed in the past, Humana generates the vast majority of its revenues through the collection of premiums paid by its clients, pooling them together and inevitably shelling out money to pay for their client’s claims, Humana specifically helping its policyholders pay for medical treatments through their packages covering dental, hearing, vision, Medicare, Medicare Advantage and a few others that the company markets, offers and administers.
Evidently, the primary goal of any insurance company is to take in more premiums than claims it dishes out.
Through all of the research I’ve previously done regarding health insurance companies, I’ve been mightily humbled by the trailing twelve month (TTM) net profit margins I’ve seen thus far, as each and every one of them, even for Humana’s most formidable foes, remained in the low single digits, which, I’ve come to realize and really grapple with over time is the fact that heightened claim payments issued by these companies can do a lot of damage to their margins, but another thing I noticed about the industry, on a more positive note, is that larger, enterprise-focused health insurance companies are typically well insulated in terms of their annual revenues, generally irrespective of the state or condition of the overall economy.
This makes some sense since regardless of boom, bust or a placid economic landscape, economic conditions will not likely have any material impact on one’s need for health insurance, lending itself to be a rather boring, stable yet tried-and-true industry, however, it is also one that is naturally caught within the crosshairs of government affairs and policies thereof, some beneficial and some stifling, which is just yet another consideration, well, to consider (don’t judge, I did that on purpose, y’all), as a potential shareholder of Humana Incorporated.
With that somewhat brief bit of background on Humana, maintaining a market share within the health insurance industry of nearly 9%, which is substantial, to say the absolute least, let’s learn more about the company’s financials and the other figures and metrics that truly matter, in hopes of figuring out whether or not this health insurance giant’s stock is worth buying, holding and sitting on for the rest of your life.
Humana’s stock financials
As of the drafting of this stock analysis article, according to its market capitalization, Humana is a $39.1 billion enterprise with a share price of $324.14, along with its price-to-earnings (P/E) ratio of 20.17 and for as large and established as this firm is, it makes sense that it offers some sort of regular annual dividend to its stockholders, offering its owners $3.54 per share, $0.885 per quarter.
Give me one fiscal quarter of holding Humana stock (NYSE: HUM) and then I can afford the private jet.
In all seriousness, the main course within these initial stats lies within the company’s price-to-earnings ratio, and, interestingly enough, it presently resides at the fair value benchmark (20), implying that the company’s stock, even following the fall its shares have recently taken, are seemingly fully and fairly priced in, which, depending on how you look at it, could be a good thing or perhaps a not-so-good thing, but trading at fair value is hardly an issue and investing has never been so binary in that if a stock’s price-to-earnings ratio is trading at 20, it automatically has a ceiling imposed on itself and can’t rise above this level.
All things initially considered, Humana’s shares aren’t off to a bad start as far as dividends and valuations go, in my humble opinion.
Moving into more of the financial meat in the context of this company, Humana’s executive team is tasked with overseeing and making do with just north of $47 billion in terms of total assets along with just about $30.8 billion in terms of total liabilities, overall posing an attractive balance sheet breakdown as the company’s total assets outweigh the aggregate amount of its liabilities by a wide margin, especially favorable given that it indicates that Humana can more than reasonably finance both internal and external growth initiatives, which is something I was especially hoping for from a large and boring insurance firm such as this one.
Whether it is dedicating more spend towards its dental division or picking up new contracts and plans or perhaps wholly acquiring smaller but similar health insurance companies, Humana seemingly has the financial wherewithal to pursue such activities for the foreseeable future.
Now, when it comes to the company’s income statement, Humana’s annual revenues over the last handful of years have been growing at a truly impressive rate given the base off of which it is operating off of to begin with, specifically with its revenues in 2019 notched at $64.8 billion, $77.1 billion in 2020, a little over $83 billion in 2021, almost $93 billion in 2022, all preceding its most recently displayed revenue figure for 2023, $106.3 billion, which is something I frankly did not expect.
At all.
This is some very serious revenue growth on a year-over-year (YOY) basis and frankly knocked my socks off, as I fully expected the company to have annual revenues well into the billions and for them to be basically stagnant or the same each and every year, but growth at this rate with not a lapse therein is both something to be plenty excited about but to also briefly ponder as the company’s stock price has essentially moved in the opposite direction of its revenues.
The sentiment seems to be just resoundingly negative and while I am sure there is some rhyme and reason behind this phenomenon, it certainly is not on the basis of its revenues.
Perhaps its profit margins?
I’ll further expand on this later, but as it relates to the condition of the company’s cash flow statement, Humana’s total cash from operations spanning during and between 2019 and 2023 have most definitely been flashing an overall negative trend signal, gradually declining during this era, specifically from a perch of around $5.3 billion in 2019, even actually rising the next year to just north of $5.6 billion, but beginning its recent steady decline, down to $2.2 billion in 2021, $4.5 billion in 2022, towards its latest reported and displayed figure of $3.9 billion, as reported in 2023, whereas one of its largest and fiercest competitors, UnitedHealth Group, actually reported growing year-over-year total cash from operations figures, spanning between $18.4 billion (2019) and $29 billion (2023), evidently standing much taller and trending in nothing but the right direction.
This could most definitely be a byproduct of Humana not being engaged in as profitable lines of insurance as UnitedHealth and/or the company needing to adjust (and rather quickly, at that) and find ways to cut out less necessary yet costly expenses that are eating into its margins, of which we aren’t even coming close to thinking highly of at this rate.
Humana’s stock fundamentals
And with this company’s margins, Humana’s net profit margin is pegged at a measly yet somewhat to be expected 1.88%, as I previously mentioned just how thin and unattractive health insurer’s (net) profit margins can be, taking this with a partial grain of salt given the nature of the industry, as, for example, Cigna, yet another one of Humana’s direct competitors maintains a net profit margin of 1.87%, nearly identically aligned and equally impressive.
I’m not thrilled, but I am not horribly bummed given the profitability status quo within the health insurance landscape.
While somewhat still on the subject of this here company generating profit, let’s also briefly talk about this company’s returns.
Specifically, according to Charles Schwab’s platform (yes, in the middle of the composing of this stock analysis article my TD Ameritrade account morphed into a Schwab account following the finalization of Schwab’s acquisition of TD, but someone near and dear to me recently received an offer to intern at Schwab (they are seriously so impressive it’s not even funny) so I’m not complaining, they can help me navigate the platform if need be because they are awesome) Humana’s return on equity can be found in the lower end of the competitive bunch, sitting at 12.17%, which isn’t all too bad on its own, but in contextualizing this figure with the competition, companies such as Molina Healthcare and Cencora maintain far better returns on this front, perhaps partially by virtue of being smaller, leaner health insurers.
Nevertheless, a comparably low return on equity generally implies that the company’s management team hasn’t been the most strategic when it comes to generating returns from the projects it puts into place and the various business segments it operates, which, yeah, is sort of a big deal, and could (and more than likely is) also be attributed to the company’s low net profit margin, naturally making it more challenging for the company to properly reinvest and optimize its platforms and operations.
Should you buy Humana stock?
Humana is a big, important company, and there are objective financial positives within this company, such as its current valuation (this company’s shares are quite historically cheap, but let’s not instantly think that means it’s a steal and catch a falling knife in the process), not to mention the overall total asset-heavy structure of its balance sheet, the recession resistant essence of its business model(s) and landscape within which it operates along with my personal favorite, its exceedingly impressive year-over-year revenue growth.
Nevertheless, for such a large and important company with I would assume has a good deal of pricing power, Humana sure doesn’t extract a lot of profit from its overall business(es), and while I would love to give the company a sort of pass on this front, as again, the health insurance industry standard is low and unimpressive in the first place, not even scratching the surface at 2% while others are doing considerably better in this regard is far from encouraging, and I also don’t see any current meaningful catalysts that could drive the change this company needs in order to beef up its margins at the moment.
Right or wrong, I think it is also somewhat fair for me to say that it is hardly any secret that over time, people have become exponentially less and less healthy, which, to me, is an unequivocal headwind for the entire health insurance industry and marketplace, as this inherently means it will be harder for companies such as Humana to hold onto the premiums it receives, meaning the profitability picture can quite easily become increasingly bleak and frankly depressing.
All things considered, right now I feel it is both best and fair to render this company’s stock (NYSE: HUM) a “sell” rating.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.
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