Here’s Why Humana Stock May See Higher Levels

We think that Humana stock (NYSE: HUM) currently is a better pick compared to Cigna stock (NYSE:CI), despite Humana being more expensive of the two. Humana trades at about 0.7x trailing revenues, compared to 0.4x for Cigna. Although both the companies have benefited from the rise in total number of enrollments for Medicare plans over the recent years, Humana’s financial performance has been better during the pandemic, driven by higher Medicare Advantage premium income as well as increased healthcare services revenues. However, there is more to the comparison. Let’s step back to look at the fuller picture of the relative valuation of the two companies by looking at historical revenue growth as well as operating margin growth. Our dashboard Humana vs Cigna: Industry Peers; Which Stock Is A Better Bet? has more details on this. Parts of the analysis are summarized below.

1. Humana’s Recent Revenue Growth Has Been Stronger

Now, although Cigna’s average revenue growth over the last three years was stronger than Humana’s (79% vs. 13%), given the company’s acquisition of Express Scripts in December 2018, expanding the company’s pharmacy management business, things changed meaningfully through the Covid-19 pandemic. Humana is now focused on expanding its healthcare services at home. A few months back Humana announced the acquisition of One Homecare Solutions, a home care provider. Earlier this year, Humana announced the acquisition of the remaining 60% stake (Humana owned 40% earlier) in Kindred At Home, the largest home-based care provider in the U.S. These acquisitions will bolster Humana’s revenue growth going forward.

Humana’s revenues grew by about 19% to $77 billion over the last twelve-month period, compared to levels of around $65 billion in 2019, prior to the pandemic. The rise was primarily due to growth in Medicare Advantage enrollments to 43.4 million currently, compared to 35.9 million in 2019. Our Humana Revenues dashboard provides more insight on the company’s revenues. Looking at Cigna, total revenue grew by about 8% over the last twelve months to about $167 billion, compared to $154 billion in 2019, driven by both growth in pharmacy revenues as well as Medicare enrollments.

2. Both Companies Have Seen Similar Margin Growth

Both companies have seen their operating margins decline around 150 bps over the last three years period, while they have grown over 150 bps in the last twelve month period. Humana’s operating margin of 6.5% over the last twelve month period compares with 4.9% in 2019, before the pandemic. The current operating margin of 7.1% for Cigna is a tad higher compared to Humana, and it compares with the 5.4% figure in 2019. Overall, for both the companies, margins are more or less similar and have seen similar growth over the recent past. We expect margins for both companies to pick up going forward. While Humana stands to benefit from strength in its Medicare enrollments as well as home health business, Cigna’s margins could also pick up with the rise in pharmacy management business.

The Net of It All

Now that over half of the U.S. population is fully vaccinated against  Covid-19, with overall economic activity picking up, the demand for home healthcare services is likely to rise going forward, boding well for Humana. However, for Cigna, its growth outlook is dependent on market share gains for its pharmacy management business. Covid-19 is proving more difficult to contain than initially thought due to the spread of more contagious virus variants and infections in the U.S. are surging once again. That said, both the companies have seen margin expansion since the pandemic.

While Cigna’s current valuation is slightly more attractive than that of Humana, with HUM stock trading at about 0.7x trailing revenues, versus about 0.4x for Cigna, the debt levels are much higher for Cigna. Although net debt for Cigna has reduced from $33 billion in 2019 to $29 billion currently, it is much higher than just $4 billion for Humana. Cigna’s debt levels surged over the recent years due to its Express Scripts acquisition. Overall, we think this gap in valuation between Cigna and Humana is justified. In fact, looking forward, it won’t be surprising if the gap expands further to favor Humana, which has better near-term prospects and possibly lower risk. As such, we believe that Humana is currently a better buying opportunity compared to Cigna stock.