Everybody wants youth. The demographic age group of 18-35 makes TV executives salivate. The country's whole consumer culture is directed toward making people think, act, and feel younger. But you know what? There's still money to be made from the older age group.
For health-benefits company Humana (NYSE: HUM ) , those older folks on Medicare are proving to be worth quite a bit indeed.
Results for the second quarter don't fully explain why this stock was up 10% in early Monday trading. Total premiums grew only about 4% and operating income was up all of 9%. Pre-tax earnings from the commercial sector were down about one-third in the quarter, but they were up 22% for government (principally Medicare and TRICARE) business.
Simply put, Medicare has been a great opportunity for Humana. In the Medicare Advantage business, revenue was up 41% to nearly $1.1 billion -- about one-third of the company's total -- and the medical loss ratio (a measurement of the company's medical expenses) improved modestly. While total government medical membership was up 10%, Medicare Advantage membership grew nearly 29% to 474,300 members.
With this strength, numbers are going up at Humana. The company believes it may end the year with 550,000 members in the Medicare Advantage program -- about 10% higher than previous expectations. On an earnings basis, management is now projecting a range of $2.23 to $2.25 for 2005, and $2.80 in 2006. That's a solid comparison to current mean estimates of $2.12 and $2.49, respectively.
Clearly, then, this strong Medicare business is serving Humana well. The comapny's success compares favorably with businesses that have larger commercial components, such as WellPoint (NYSE: WLP ) , UnitedHealth (NYSE: UNH ) , and Aetna (NYSE: AET ) , where enrollments have been slower and price competition is more of a risk. While Humana isn't the only game in town for Medicare, it takes a considerable investment of resources to compete for this business, and Humana does have some early advantages.
Humana's relatively low margins and internal returns certainly aren't points in its favor, but it's difficult to argue with growth. While these shares have already enjoyed a great run (up more than 120% in the past year), today's guidance would suggest Humana still has room to grow and improve. Furthermore, with the industry seeming to lean toward consolidation, Humana could find itself the object of another company's desires.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that
means he's neither long nor short the shares).
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