The prognosis looks good for health insurer Humana (NYSE:HUM). The stock has seen a robust recovery this year, setting new 52-week highs in advance of Medicare reforms signed into law last week -- but the best may be yet to come.

As one of the biggest providers of Medicare HMO plans, Humana has a head start on competitors such as Aetna (NYSE:AET), Coventry (NYSE:CVH), and Health Net (NYSE:HNT). The program's overhaul may give a small boost to 2004 earnings, but since key reforms won't kick in until 2006 or later, the longer-term gains should be even stronger. Humana is planning to exploit the new system by expanding its "Medicare Plus Choice" market presence, becoming a regional provider for Medicare's pricey new PPO (preferred provider organization) coverage, and offering a prescription drug stand-alone plan.

The full effect of Medicare reforms is just starting to be more fully factored into the stock's growth projections. Earnings this year are expected to jump 22%, compared to the industry average of 10%, and next year's earnings are estimated to grow by another 11% to $1.62 per share. That figure has been upwardly revised in the last 90 days from $1.60, and only last week analysts were calling for earnings of $1.61. As more analysts twig to the increased opportunities for earnings growth from this Medicare windfall, this pattern of upward revision could continue.

Though Humana's stock was in the doghouse for many years, it has rewarded long-term investors this year with an incredible run that saw it almost triple in value. It ain't over yet, if the company plays its cards right. With a forward P/E of only 14 times projected 2004 earnings, the shares still have room to move. If earnings exceed expectations and analysts up their ante, the stock should react positively and investors stand to gain.

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