Take Long View

What: Disappointment concerning a supposedly imminent deal to acquire Humana (NYSE:HUM) led to the company's shares slumping 10.7% in June.

So what: Rumors that Cigna (NYSE:CI) and Aetna Inc. (NYSE:AET) are courting Humana have been circulating since May, leading Humana to become one of 2015's best-performing insurers, with shareholders sitting on a 33.5% gain this year even after factoring in last month's loss.

It's unclear just how much of a premium an acquirer would be willing to pay to acquire Humana, but Humana's Medicare-heavy business model and its recent push into the individual market via the healthcare exchanges make it a desirable target for both of these large insurers.

Humana Exterior Angle

Source: Humana

Now what: Although both Cigna and Aetna have been discussed as suitors, an offer by Anthem to acquire Cigna for $184 per share makes it less likely that Cigna will remain in the hunt. Instead, it seems more likely that it will be Aetna that makes the winning bid; if so, Humana would significantly expand Aetna's Medicare footprint.

As of the first quarter, 3.2 million people were enrolled in Humana's Medicare Advantage products, up double digit percentages year-over-year. Humana also provides Medicare Part D plans to more than 4.3 million Americans.

Significantly, Humana's guidance for this year calls for an additional 300,000 to 350,000 people signing up for its Medicare Advantage plans, and another 450,000 to 500,000 people signing up for its prescription drug plans.

That's far more people than Aetna covers through its Medicare products. At the end of the first quarter, Aetna's Medicare Advantage membership totals 1.2 million people, and enrollment in its prescription drug plans totals shy of 2.3 million people.

If no suitor emerges or Humana's board decides to go it alone, Humana investors could still come out OK. Humana is guiding for sales of between $54.25 billion and $54.75 billion and EPS of between $9.85 and $10.45 this year. If the company delivers on those projections, it will represent top and bottom line growth of at least 11.8% and 31.2%, respectively -- and that may make Humana worth owning in portfolios. 

 

Todd Campbell has no position in any stocks mentioned. Todd owns the equity research firm E.B. Capital Markets, LLC. E.B. Capital's clients may have positions in the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.