Humana Stock: Destined For A Long-Term Success (NYSE:HUM)

Investment Thesis

Humana Inc. (NYSE:HUM) and its affiliates provide healthcare and wellness services to people in the United States. The company has shown resilience and good results despite the challenging macroeconomic climate stemming from Covid-19 related challenges, which saw world economies post negative GDP growth, and the present global inflation.

Humana Inc.’s stock price is up almost 30% in the past year. Not only has the company seen its share price rise, but it has also consistently generated free cash flows, leading to high levels of liquidity and a solid balance sheet. Considering the company’s current financial condition and the benefits the company would derive from the mega Tricare contract it just won, I am confident in projecting that Humana Inc. will even demonstrate very strong future growth. In addition, the fact that it has the highest-rated Medicare insurance in the United States demonstrates how delighted its clients are, which should prove to be a significant boon to the company’s growth in the future.

The Tricare Contract: A Major Boost To Future Earnings

TRICARE is the health care program for military service personnel, retirees, and their families. The Defense Health Agency of the U.S. Department of Defense has given Humana Military the next managed care support contract for the TRICARE East Region. The contract is worth $70.9 billion and is set to start in January 2024. Humana Military’s service area would expand to include 24 states and DC, with coverage for an estimated 4.6 million beneficiaries. The contract has a one-year “base year,” followed by eight one-year “option periods,” for a potential nine-year commitment if all options are exercised. It’s the longest contract term for TRICARE since the program began in 1995.

I believe the fact that this is the sixth contract of its kind to be awarded to them, and the longest one at that is indicative of the high quality of service they provide and the confidence their clients have in them. Only if the services are reliable and trustworthy will customers return for more. The company stands to gain a substantial amount of new business and revenue from this contract. As time goes on, I think the company will be able to attract even more clients.

Medicare Advantage: First-Rate Position, Justly Earned

U.S. News and World Report’s honor list based on the Centers for Medicare and Medicaid Services’ new Star Ratings for Medicare Advantage Plans named Humana the top Medicare Advantage plan provider. It got an average rating of 4.3 stars out of 5 across all 50 states for 2023. With more than 5.1 million people registered in 2022, it is one of the major suppliers of Medicare Advantage plans, and its plans are offered in 85% of U.S. counties.

Its advantages included over-the-counter benefits, telemedicine coverage, $0 monthly plan premiums in most regions, caps on yearly out-of-pocket expenses, official Special Needs Plans (SNPS) in 38 states, and a wide range of physicians and hospitals. In addition, Humana was named the top company for the overall satisfaction of its members. Medicare Advantage plans are evaluated by the Centers for Medicare & Medicaid Services (CMS) based on a number of criteria, including the ease with which members can access care and see specialists, the timeliness with which members can schedule appointments, members’ own ratings of the health plan, and the effectiveness with which medical providers coordinate care.

As if that wasn’t enough proof of Humana’s dominance, they were also named the best firm for low-premium plans. In 2022, Humana offered 420 no-premium plans across almost all states.

What About This Insurance Plan?

On analyzing the company’s top ranking which I believe the company is justified to be top, I am pleased by how the company is serving its clients. From making its services affordable through the zero premium plans in most of the states to convenience in booking appointments. Additionally, the plan is available in 85% of the states, which makes them very accessible.

If I had to sum up the whole plan, I’d say that their medical services are easy to get to, cheap, and very convenient, which is something I think everyone wants but rarely gets. Therefore, I am convinced that this will serve as the company’s greatest competitive advantage and will play a crucial part in its future development. In the future, I foresee the company’s market share growing dramatically as more people sign up for this user-friendly service. The company aims to increase plan membership by more than 7 percent this year, something I believe is feasible; if they succeed, they would see a substantial increase in revenue.

According to Bruce Broussard:

“we are anticipating individual Medicare Advantage full year growth of 325,000 to 400,000 members. This represents an expected growth rate of 7.1% to 8.7%, in line with our expectation of high single-digit industry growth.”

Robust Balance Sheet and Consistent Cash Flows

I would say that Humana Inc. has a strong balance sheet right now. First of all, the company owes a total of $10.83B, which is 0.18X its market capitalization of $61.37B. Its annual financial leverage is 0.797, which is below the standard value of 1, making it a less risky company. The company’s high level of liquidity is the most intriguing component of its balance sheet. I believe that the company’s financial strength is shown in its $26.68B cash balance, which is sufficient to cover its current total debt 2.5X.

The firm appears to be making good use of its assets, as evidenced by its return on total assets of 5.53% compared to the industry median of -31.06 and its asset turnover ratio of 1.90% compared to the industry median of 0.34%.

Based on these indicators, I am confident in the company’s ability to weather the current macroeconomic storm and lead itself toward sustained future growth since the company has consistently demonstrated positive cash flows, I anticipate that it will continue to record good cash balances in the future. The company has generated over $2 billion in operating cash flow every year since 2017, and it is now generating a whopping $9.6 billion in operating cash flow and a levered FCF of $11.46 billion on a TTM basis. Humana has generated very strong free cash flow during the past three years, equivalent to about 95% of its EBIT, this in my view shows its strong ability to repay its debt and finance developments. With its Medicare insurance serving as a primary driver to future cash flow production and the contract it secured, I estimate these cash flows to expand by a double-digit by 2024.

Investors’ Corner: Dividend and Share buybacks

As a result of its outstanding performance, Humana Inc. is well-known for its practice of returning cash to shareholders through dividends and share repurchases. By 2024, the corporation plans to have returned $3 billion to shareholders through share buybacks, under a plan adopted in 2021. This action will increase shareholders’ ownership of the company, which should boost earnings and the stock price.

Humana Inc. has also increased its dividend payment rate by six years in the past decade and has paid dividends consistently for ten years. A dividend payment ratio of 12.33% is sustainable in my opinion. Given the aforementioned growth levers and the firm’s current excellent financial position, which I expect to rise enormously in the coming years, I expect the dividend growth history of the company to continue.

Risks

There are risks associated with investing in Humana Inc., despite the fact that it appears to be a future exclusive boom. First of all, consumers’ ability to spend is being hampered by high commodity prices, which in turn is a result of the persistently high inflation rate in the U.S. A recession could hit this year, making matters even worse for consumers’ ability to spend. Some of the company’s potential and premium clients might reduce their healthcare spending as a result of this.

Conclusion

To sum up, Humana Inc. is a solid investment with a number of favorable structural factors. Though I recommend buying Humana Inc. stock, shareholders should be aware of the company’s possible risks.