Will Humana’s Stock Outperform?

With shares of Humana Inc. (NYSE:HUM) trading at around $78.14, is HUM an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Q4 EPS came in at $1.19, which beat the average expectation of $1.06. However, EPS was a penny lower year-over-year. Q4 revenue came in a $9.56 billion, which missed the average expectation of $9.73 billion. However, it was higher than the $9.06 billion we saw for the same quarter last year. The retail business hurt profits mostly due to rising costs, but operating expenses and healthcare for employees were both down. Overall, Humana did a good job controlling higher costs. For FY2012, EPS came in at $7.47, beating expectations. FY2012 revenue was $39.13 billion, which was a 6 percent increase year-over-year.

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Humana offered solid guidance. EPS expectation for Q1 is between $1.75 and $1.85. This is above the original analyst consensus of $1.53. FY2013 EPS is expected to come in between $7.60 and $7.80. FY2013 revenue is expected to come in between $41.00 billion and $41.50 billion. Put simply, Humana is expecting solid growth in 2013.

Let’s take a look at some important numbers prior to forming an opinion on the stock…

E = Equity to Debt Ratio Is Strong  

The debt-to-equity ratio for Humana is strong. The balance sheet is impressive.

Debt-To-Equity

Cash

Long-Term Debt

HUM

0.22

$9.42 Billion

$1.89 Billion

CI

0.55

$2.24 Billion

$5.21 Billion

UNH

0.54

$11.44 Billion

$14.04 Billion

 

T = Technicals on the Stock Chart Are Strong   

The past year as a whole hasn’t been kind to Humana when it comes to stock performance, but the recent trend has been up. Humana has outperformed Cigna Corp. (NYSE:CI) and UnitedHealth Group Incorporated (NYSE:UNH) so far this year. UnitedHealth Group has the highest yield of the three at 1.50 percent, but Humana isn’t far behind at 1.40 percent. Cigna currently yields 0.10 percent.

1 Month

Year-To-Date

1 Year

3 Year

HUM

15.86%

13.90%

-12.70%

69.52%

CI

8.17%

10.78%

36.11%

77.21%

UNH

6.93%

2.69%

10.15%

78.54%

 

At $78.14, Humana is currently trading above all its averages. 

50-Day SMA

68.65

100-Day SMA

70.36

200-Day SMA

72.96

 

E = Earnings Have Been Steady          

Up until 2012, earnings had been improving since 2008. Revenue has been steadily improving since 2007, which is impressive.

2007

2008

2009

2010

2011

Revenue ($)in billions

25.29

28.95

30.74

33.60

36.83

Diluted EPS ($)

4.91

3.83

6.15

6.47

8.46

 

We already know what happened this quarter. Now let’s take a look at previous quarters.

9/2011

12/2011

3/2012

6/2012

9/2012

Revenue ($)in billions

9.30

9.06

10.22

9.70

9.65

Diluted EPS ($)

2.67

1.22

1.49

2.16

2.62

 

T = Trends Do Not Support the Industry

The industry has had to deal with rising costs and downward pressure on payments from U.S. government medical services. Looking ahead, the U.S. government will begin selling insurance directly to consumers through electronic health exchanges. Furthermore, operating expenses for military healthcare have increased. However, Humana has been managing the storm well.

Conclusion

Humana should be able to overcome challenges and continue to grow in 2013. When a company shows consistent revenue growth on an annual basis, it should always be considered as a top-tier option. What adds to the appealing nature of this situation is a strong balance sheet. The yield isn’t overly impressive, but it’s not going to hurt.

If the market holds up, then Humana should perform well. This isn’t likely to be an extraordinary stock in 2013, but solid returns are likely. That said, if the market tear over the past few years proves to be yet another bubble, then all bets are off. As long as the broader market holds steady, Humana is an OUTPERFORM.

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