Club holding Humana (HUM) reported a mixed-but-solid third quarter before the opening bell Wednesday. Early optimism about 2023 also supported our bullish view on the health insurer’s stock. Revenue increased 9% year-over-year to $22.75 billion, slightly below estimates of $22.76 billion, and adjusted earnings-per-share increased 42% to $6.88, exceeding estimates of $6.28 per share. Aiding earnings performance was Humana’s benefits expense ratio — also known as medical loss ratio, or MLR — which came in slightly below expectations at 85.6% versus the 85.7% consensus estimates. Remember, lower is better here. Bottom line It was another strong quarter from Humana. Full-year 2022 guidance was in-line with the updated outlook provided at the health insurer’s September investor day. But we did get some commentary looking ahead to 2023 that pushed the stock 2% higher in Wednesday’s down market. Initial individual Medicare Advantage (MA) growth expectations for next year serve to support our positive view on the path ahead, and management called out an expectation for 11% to 15% earnings growth, which at the midpoint — 13% growth or $28.25 — exceeds the $27.90 the Street had been modeling. With Humana’s initial $1 billion value creation plan officially achieved and management intent on continuing to improve operating leverage going forward, we continue to like shares, especially into an economic slowdown as health care is an especially sticky sector in terms spending. Given the continued momentum and positive outlook, we’re raising our price target to $595 per share, up from $520, representing about 21x the $28.25 per share midpoint of implied 2023 guidance. While that number represents slight multiple expansion from the slightly over 20x forward multiple shares trade at currently, we think it’s warranted given the defensive nature of Humana’s business, lack of foreign currency exposure, and our further belief that positive business momentum will allow shares to close the valuation gap with peer company and industry leader and Dow stock UnitedHealth (UNH), which trades at over 22x forward earnings. In a year during which the S & P 500 has lost more than 19%, Humana shares have gained over 21% year to date. UnitedHealth, by comparison, has only advanced roughly 9.5% in 2022. In early January, Humana stock took a nosedive after warning about Medicare Advantage growth. But since then, the company has turned its MA business around. The Club started a position in Humana in April. Q3 segment results Retail Segment , which includes Medicare benefits marketed to individuals directly or via group Medicare accounts, Medicare Supplement and state-based contract accounts, saw revenue increase 9.5% year over year to $20.19 billion, driven by individual Medicare Advantage, membership growth in state-based contracts, and higher per-member individual MA premiums. The Q3 benefits expense ratio in the quarter was 86.5%, down (again, lower is better), down from 88.1% in the year ago period. The expense ratio benefited from higher per-member individual MA premiums and lower inpatient utilization rates. Partially offsetting those benefits was lower favorable prior period development (PPD) in 2022. (Industry terms such as PPD and others throughout this story are defined by Humana in a handy glossary .) Group and Specialty Segment , which mostly consists of employer group fully insured commercial medical products and specialty insurance benefits marketed to individuals and groups, saw revenue decrease 8.5% to $1.55 billion, primarily due to the anticipated decline in fully insured commercial medical and ASO commercial memberships, partially offset by higher per-member premiums. (ASO stands for administrative services only). The Q3 benefits expense ratio in the quarter saw significant improvement, falling to 78.7% from 86.4% last year. The improvement can be attributed to a higher mix of specialty products, which has a lower benefits ratio, as well as pricing and benefit design efforts to address Covid and improve profitability. Management also highlighted a less severe Covid impact thanks to higher vaccination rates versus the year ago period. Healthcare Services Segment , which includes pharmacy, provider, and home services along with other services and capabilities to promote wellness, saw revenue increase 10.5% to $8.88 billion. Aiding segment performance was strong individual MA and state-based contracts membership growth that resulted in higher pharmacy revenues, a positive impact attributable to greater mail-order pharmacy penetration, and strength in the company’s provider business. The segment’s Q3 operating cost ratio — which is operating costs as a percent of total revenues less investment income — was 95%, unchanged from the year-ago period but a bit higher than the 94.6% so far in 2022. Outlook Management affirmed their adjusted full-year 2022 EPS outlook of approximately $25 per share, representing 21% annual growth versus 2021 an in-line with expectations. Recall, this guidance was provided at the company’s investor day event in September and represents a 25-cents per share increase versus the guide provided with the second quarter earnings release back in July . Also reaffirmed was management’s $37-per-share earnings target in 2025. Looking ahead to next year, management said they anticipate full-year 2023 individual Medicare Advantage growth of 325,000 to 400,000 members. That represents an expected growth rate of 7.1% to 8.7% in-line with management’s expectation for high single-digit percentage growth for the industry. As for earnings, though more specifics will be provided with its fourth (current) quarter earnings release, management reiterated their expectation to grow 2023 earnings at a rate in-line with their long term range of 11% to 15%, as a result — and incorporating an element of conservatism — management believes the current 2023 estimate of $27.90 per share of earnings (representing 11.6% annual growth) to match their initial adjusted EPS guidance. As we pointed out in the bottom line , the mid-point of that growth rate would put full-year 2023 EPS at $28.25. Value creation plan On the call, management commented that while they have already achieved their formal $1 billion value creation goal, they remain committed to ongoing operating leverage improvement. Capital allocation Humana did not repurchase any shares in the quarter, leaving year-to-date number of shares repurchased at roughly 2.43 million at an average price of $411.32. The company currently has $2 billion remaining under its authorization. On Oct. 27, Humana’s board declared a cash dividend to stockholders of nearly 79 cents per share payable on Jan. 27, 2023. The stock at current levels offers a 0.56% annual dividend yield. (Jim Cramer’s Charitable Trust is long HUM. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. 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Club holding Humana (HUM) reported a mixed-but-solid third quarter before the opening bell Wednesday. Early optimism about 2023 also supported our bullish view on the health insurer’s stock.
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