Morningstar | 1Q Results Put Humana on Track to Meet Our Expectations
Narrow-moat Humana reported first-quarter results that were modestly ahead of our expectations, due to better Medicare Advantage enrollment and more effective control over operating costs across the business. As we adjust our model, we don’t expect a meaningful change to our $281 per share fair value estimate, which implies a valuation multiple of roughly 16 times our 2019 estimate for adjusted earnings.Enrollment trends across the business appear to be stronger than expected, with the Medicare Advantage book growing well ahead of the broader industry. Humana's dominance in the MA market and its ability to consistently win market share underpin its narrow economic moat rating. Based on performance in the 2019 open enrollment period, Humana is poised to add nearly 13% more MA members over the course of the year compared with market growth that has averaged nearer 7% year to date, by our estimate. Further, management indicated net enrollment losses in its commercial book should be lower than originally anticipated because of stronger growth out of its employer self-funded offering. While claims in the firm's commercial book are tracking slightly ahead of expectations, MA utilization has come in better than expected, leaving the medical loss ratio in line with our forecast for the year.
While enrollment trends remain favorable, industry dynamics will pose a modest headwind to the business in 2020. With the health insurer fee unlikely to be suspended for 2020, management indicated next year's earnings growth will likely fall below its longer-term 11%-15% growth target. We had already included the fee in our model, but this implies a modestly larger bottom-line impact than we had anticipated for next year. Our long-run expectation of at least 11% EPS growth remains unchanged, and these marginal tweaks to our assumptions don't have a substantial impact on our cash flow forecast or resulting fair value estimate.
Humana is a holding company. Through its subsidiaries, the company is a health and well-being company. The company manages its business with three segments: Retail, which consists of products sold on a retail basis to individuals including medical and supplemental benefit plans, such as Medicare and state-based Medicaid Contracts; Group and Specialty, which consists of employer group commercial fully-insured medical and specialty health insurance benefits, including dental, vision and life insurance benefits, as well as administrative services only; and Healthcare Services, which includes pharmacy solutions, provider services, clinical care services, and predictive modeling and informatics services
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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