Humana is one of the largest health care providers in the U.S. and competes with other industry heavyweights like WellPoint Inc. (WLP) and Aetna Inc. (AET). The company has a strong Medicare business, which accounted for approximately 68% of the total premiums and services revenue in the first quarter of 2012.
Moreover, the Humana-Walmart (WMT)-preferred Rx plan has amplified the individual Medicare stand-alone PDP membership substantially due to its lower pricing. The alliance with CareSource is also expected to improve the quality of service for Medicare, Medicaid and dual-eligible policyholders.
Humana has maintained a strong surplus cash, cash equivalents and investment position over the past several years. The company has been utilizing its excess cash to repurchase shares, pay dividends or for other corporate purposes. Moreover, in April 2012, the company replaced its previous repurchase program with a new $1 billion program and announced a hike in its quarterly dividend to enhance shareholder value.
However, Humana has been incurring high expenses owing to increases in depreciation and amortization, interest and tax expenses and operating costs. Moreover, the company will have to pay a $45 million litigation expense during the second quarter of 2012, which will not only weigh on the company’s financials, but also prompted management to reduce its earnings per share guidance for the second quarter and full year of 2012. Moreover, such litigations weigh on investors’ sentiment and hamper the company’s goodwill.
Additionally, Humana is facing intense pricing pressure from competitors. Moreover, since a significant portion of the company’s revenues are related to federal government health care coverage programs, including the Medicare, TRICARE and Medicaid programs, any adverse change in the reimbursement rates could severely hamper the operating and financial leverage of the company.
Currently, Humana carries a Zacks #3 Rank (short-term Hold rating).
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