After the quarterly earnings announcement and discussion with Humana (Ticker: HUM) management Monday, October 31
st, investors are abuzz with excitement. Not only did the health services provider handily beat analyst expectations, they raised guidance for 2012. This, not surprisingly, resulted in a nice pop for shareholders of approximately 6% to $84.89 a share. Though the stock has since given up about 1% of that gain, that's not surprising considering some possible profit-taking and more bad news from Greece.
Here's what drove all the good tidings:
3Q profit was up 13% year-over-year to nearly $445 million or $2.67 a share; a substantial increase from $393.2 million a year ago. Revenue also increased over Q3 2010 by 11% up to $9.3 billion.
Analyst expectations for quarterly profits were $2.03 a share on revenues of $9.26 billion. While the revenue numbers were in line, HUM beat mean estimates by a whopping 31%.
Finally, analyst forecasts for 2012 averaged around $7 per share in profit. After Monday's announcement, management revised those forecasts upward, suggesting next year the company expects a profit of $7.40 to $7.60.
So the question remains, with all that good news piling up what is there to be cautious about? There are a couple of intriguing factors which, at the least, provide the opportunity for Humana to underperform based on their raised expectations.
- Humana management's disclosure highlighted the company's strong performance in increasing their Medicare Advantage (sometimes referred to as Part C coverage) membership, which in turn was the catalyst for the better-than-expected earnings.
- The other factor that played a critical role was the reduced expenses as a result of lower than expected health care costs. According to management, patient costs did not rise as expected decreasing overhead and improving margins.
Coincidentally, the government recently announced that Medicare recipients in 2012 will likely not see an increase in premium due to low inflation rates the impact of that on annual Cost of Living Adjustments (COLA). Is this concerning for 2012? Perhaps that's too strong of a word, but it is certainly something to consider. Particularly after much of the positive earnings coming from HUM was tied to Medicare revenues.
The second area of caution is the lowering of expenses due to patient costs. The consideration is; can that be sustained? Overall revenues were essentially on target with estimates, it was the reduced overhead that made such an impact. Again, is that bankable in 2012?
Monday's investors certainly thought Humana could do it again, and many went for a pleasant ride. Longer term however, investors may want to proceed with caution.
