Should You Pick Humana Stock After A 25% Fall This Year?

Humana (NYSE: HUM) currently trades around $350 per share, 30% below its peak level of over $500 seen in September 2022, and it seems like it can see higher levels over time. HUM stock was trading at around $470 in June 2022, just before the Fed started increasing rates, and is still 25% below that level. This compares with a 37% rise in the broader S&P 500 index over the same period. This underperformance of Humana can primarily be attributed to a downbeat guidance for 2024 and 2025.

Looking at a slightly longer term, HUM stock has seen a decline of 15% from levels of $410 in early January 2021 to around $350 now, vs. an increase of about 40% for the S&P 500 over this roughly 3-year period. However, the decrease in HUM stock has been far from consistent. Returns for the stock were 13% in 2021, 10% in 2022, and -11% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that HUM underperformed the S&P in 2021 and 2023.

In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for heavyweights in the Health Care sector including LLY, UNH, and JNJ, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could HUM face a similar situation as it did in 2021 and 2023 and underperform the S&P over the next 12 months — or will it see a recovery? From a valuation perspective, HUM stock looks like it has ample room for growth. At its current levels of $350, HUM stock trades at 0.4x revenues, compared to 0.6x average value over the last five years. Our Humana (HUM) Valuation Ratios Comparison dashboard has more details.

Our detailed analysis of Humana’s upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022. It compares these trends to the stock’s performance during the 2008 recession.

• 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers unable to match up.
• Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt supply.
• April 2021: Inflation rates cross 4% and increase rapidly.
• Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process.
• June 2022: Inflation levels peak at 9% – the highest level in 40 years. The S&P 500 index declined more than 20% from peak levels.
• July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline.
• October 2022 – July 2023: Fed continues rate hike process; improving market sentiments helps S&P500 recoup some of its losses.
• Since August 2023: Fed has kept interest rates unchanged to quell fears of a recession but points to potential rate cuts in 2024

In contrast, here’s how HUM stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

Humana and S&P 500 Performance During 2007-08 Crisis

HUM stock declined from $71 in September 2007 (pre-crisis peak) to $24 in March 2009 (as the markets bottomed out). It recovered after the 2008 crisis to levels of around $44 in early 2010, rising over 85% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 (pre-crisis peak) to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.

Humana’s Fundamentals Over Recent Years

Humana’s revenue increased to $106 billion in 2023, compared to $83 billion in 2021, led by a strong growth in its Medicare premiums. The total number of Medicare membership increased by 2.2% to 8.8 million in 2023, versus 8.7 million in 2021, The average premium also increased over this period.

Humana’s operating margin increased from 3.8% in 2021 to 4.1% in 2022 but fell to 3.8% in 2023. This resulted in a $318 million decline in the company’s net income in 2023. Our dashboard — What Drove Net Income Change For Humana – has more details. Humana saw its medical costs ratio rise to 87.3% in 2023 versus 86.7% in 2021. The company’s earnings stood at $20.00 on a per-share and reported basis in 2023, compared to the $22.67 figure in 2021.

Does Humana Have A Sufficient Cash Cushion To Meet Its Obligations Through The Ongoing Inflation Shock?

Humana’s total debt decreased slightly from $12.8 billion in 2021 to $12.0 billion now, while its cash increased from $19.7 billion to $23.3 billion over the same period. The company also garnered $4.0 billion in cash flows from operations in the last twelve months. Given its solid cash cushion, with net debt positive balance sheet, Humana is in a comfortable position to service its near-term obligations.

Conclusion

With the Fed’s efforts to tame runaway inflation rates helping market sentiment and rate cuts are likely in the cards, we believe HUM stock has the potential for more gains once fears of a potential recession are allayed. That said, there are near-term concerns. Although Humana expects its Medicare Advantage membership to rise by 100K in 2024, its estimate of $16 adjusted EPS compares with $26 in 2023, and is significantly lower than the consensus estimate of $29 per share (at the time when Humana reported its Q4 results). This can primarily be attributed to rising medical costs ratio, which surged to 90.5% in Q4’23, versus 87.1% in the prior-year quarter. Humana expects this trend to continue in 2024. At its current levels, HUM stock is trading at 22x 2024 earnings, aligning with its average over the last three years. However, the figure drops meaningfully to 14x if we consider the 2025 earnings estimate of $25. We think that much of the negatives are priced in for Humana, and if it delivers earnings or medical cost ratio better than the current guidance, it will likely result in higher levels for the stock.

While HUM stock can see higher levels, it is helpful to see how Humana’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 3/20/2024
[2] Cumulative total returns since the end of 2016

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