On Wednesday, BofA Securities adjusted its stance on Humana Inc . (NYSE:HUM), downgrading the health insurance giant from Buy to Underperform. The firm also slashed Humana's price target to $247 from the previous $376. This change follows Humana's recent disclosure that it has lost its leading position in Medicare Star ratings, with only 25% of its members enrolled in plans rated above 4 Stars, a significant drop from the prior 94%.
The downgrade is rooted in the anticipated revenue impact due to a reduction in bonus payments from Medicare. Humana's preliminary data suggests that the decline in 4 Star members could translate to a revenue headwind of more than 3.5% for its Medicare business, equating to approximately $23 per share in 2026. This potential loss, BofA Securities notes, could nearly wipe out the company's earnings for that year.
Humana has indicated that the Star ratings decline does not have an immediate effect on its 2024-2025 results. However, the firm believes that the setback could delay the recovery of Humana's profit margins and potentially alter the perception of the brand among seniors and brokers during the upcoming open enrollment period.
Despite the pending appeal that Humana has filed, which could be resolved by October 10, 2024, there is concern that the full recovery of the ratings might take longer than initially expected.
In response to these developments, BofA Securities has also revised its 2026 earnings per share (EPS) estimate for Humana to $13, down from the previous estimate of $25. This new EPS forecast assumes that Humana will be able to mitigate roughly half of the impact through capitation and benefit reductions. The price target of $247 is now based on a multiple of 19 times the projected 2026 EPS, aligning with the five-year average multiple for the company.
In other recent news, Humana has witnessed a significant decrease in its Medicare Advantage Star Ratings for 2025, with only about 25% of its members enrolled in plans rated 4 stars and above, a substantial reduction from 94% in 2024. This decline is largely attributed to Humana's contract H5216, which accounts for roughly 45% of Humana's Medicare Advantage membership and fell to a 3.5-star rating from a 4.5-star rating the previous year. Barclays (LON:BARC) has maintained its Overweight rating and $364.00 price target on Humana, while TD Cowen reaffirmed its Buy rating with a steady price target of $402.00. On the other hand, Leerink Partners has downgraded Humana's stock from Outperform to Market Perform, citing the company's future performance concerns due to the lower star ratings. Furthermore, Morgan Stanley (NYSE:MS) and JPMorgan (NYSE:JPM) have both maintained their respective Equal-weight and Neutral ratings on Humana.
The company is actively exploring options to mitigate the expected revenue headwind for 2026 related to the 2025 Star ratings. In related news, Evolent Health (NYSE:EVH), a significant customer contributing to 21.8% of Evolent's second-quarter 2024 revenue, may be impacted by Humana's updates.
However, JPMorgan has maintained its Overweight rating and $45.00 price target for Evolent Health, indicating that the company's fees for managing specialty care in Medicare Advantage contracts are unlikely to be impacted.
InvestingPro Insights
Recent data from InvestingPro sheds additional light on Humana's current situation. Despite the downgrade and potential revenue challenges, Humana maintains a strong financial position with a market capitalization of $29.72 billion. The company's P/E ratio of 17.6 suggests that it's still valued at a reasonable level compared to its earnings.
InvestingPro Tips highlight some positive aspects of Humana's financial health. The company holds more cash than debt on its balance sheet, indicating financial stability. Additionally, Humana has raised its dividend for 7 consecutive years, demonstrating a commitment to shareholder returns even in challenging times.
However, the stock's recent performance aligns with BofA's concerns. InvestingPro data shows that Humana's stock has taken a significant hit, with a 1-week price total return of -10.17% and a 1-month return of -20.95%. This decline is consistent with the market's reaction to the Star ratings news and the subsequent downgrade.
For investors seeking a more comprehensive analysis, InvestingPro offers 11 additional tips for Humana, providing a deeper understanding of the company's financial health and market position.
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