Make hay while the sun shines. In other words, if you find yourself holding a stock that a lot of other people suddenly want to own, hang on and enjoy the ride . but keep an eye on the exits and don't end up "round-tripping" yourself back down. Whether that proves to be good advice with the stock of health benefits company Humana
Certainly, the fourth-quarter results looked all right. While revenue missed the average estimate, it was still up 14% from last year. As for the earnings, if you look past the expenses tied to the hurricanes, the company saw 59% growth from last year and just beat the average published estimate. Even if you choose not to look past the hurricane adjustments, earnings per share were still up 34%.
The key to the strong earnings performance was good cost control. Although sales, general, and administrative spending actually went up as a percentage of revenue (for investments related to building the Medicare business), that's only a rather minor piece of the pie. It's medical costs that really matter here. On that score, the company saw its MLR (medical loss ratio) decline to 82.1% from 84.7% -- even lower (to 81.5%) when you exclude the hurricanes. For those not overly familiar with the concept, medical loss ratio is the ratio of medical expenses to premium revenue -- in other words, what Humana is paying out in benefits relative to what it's earning from enrollees.
Looking out to the year ahead, the folks in management seem to be feeling quite confident. They put forth guidance for 2006 that could be as much as 10% higher on the revenue line and 3% or higher on the EPS line. Relative to the likes of Aetna
Still, I have my concerns here. Not only do I wonder how much longer the commercial health benefits party can last, but in the case of Humana, I'm also still concerned that aggressive bidding to grow the Medicare business could result in higher underwriting risk in the future. But the thing about underwriting risk is that you don't know until you know. For the present, though, if you think my concerns are overblown, the stock probably looks cheap.
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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).