Humana: Shares Steeply Undervalued as Uncertainty Around Medicare Advantage Profit Trajectory Rises

We are reducing our fair value estimate to $425 per share from $473 previously on news that Humana's Medicare Advantage star ratings have dropped substantially, which will negatively affect marketing for 2025 plans and 2026 bonus payments. Given this development, management also stated that reaching its target operating margin of 3% in that business may prove difficult by 2027. With increasing uncertainty around its intermediate-term profit trajectory, we have raised our Uncertainty Rating to High from Medium previously. We also reduced our intermediate-term expectations for the firm based on these disclosures, but we still view shares as significantly undervalued with shares trading at just 14 times 2024 expected earnings, which are expected to decline about 40% on challenges in the Medicare Advantage market.