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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week


August 14th 2009 Humana
NYSE Symbol: HUM
Industry: Healthcare
Price as of 8/14: $34.69

The markets have been on a tear since March with the three major averages all rising over 45%. With the recent run up in stocks the valuations, at least in the short term, are not as compelling. Many on Wallstreet are expecting a pullback which probably means if we get one, it will be modest at best. Remember, with the Dow at 9400 we're still negative for the last 10 years. Some sectors like healthcare and financials remain very cheap due in part to the amount of influence the government is yielding over these two industries. Just this week, one of the most closely followed hedge fund managers, John Paulson disclosed some big positions in these two sectors. Bank of America jumped 5% after Paulson disclosed he owned 168 million shares or $2.8 billion. And in the healthcare sector, we're featuring Paulson's new position in Humana. Humana is one of the largest healthcare providers in the country with a large division that assists the government, and in particular, the military. Humana reported solid earnings last week and continues to slowly grind higher, but on every metric the stock remains very cheap with plenty of long term capital appreciation.
As mentioned, Humana reported earnings last week beating estimates by 3 cents or $1.67 per share. Revenues rose 7.5% year to $7.64 billion slightly missing consensus estimates. The company issued in-line earnings guidance for the third quarter of $1.75-1.80, excluding non-recurring items, vs. $1.78 consensus. Humana issued in-line guidance for full year 2009, with earnings of $6.10-6.20, excluding non-recurring items, verse $6.12 consensus. Humana reported second quarter total premium and administrative service fees increased 8% compared to the prior year's quarter. The increase was primarily driven by improvements in the Government Segment and Commercial Segment benefit ratios, respectively. Medicare Advantage membership grew to 1,499,800 at June 30, 2009, an increase of 154,800 members, or 12%, from June 30, 2008, and up 63,900, or 4% verse December 31, 2008. For the full year Humana expects an increase of approximately 50,000 from prior year in Medicare Advantage membership. Obviously, Humana continues to perform well, but all eyes are on governments actions to reform the healthcare sector.
Humana's valuation is great. Earnings will be down this year, but the PE is extremely low. The stock trades for 6.4 times next years earnings, 0.19 times sales, and just above its' book value of $29.80 a share. Humana has $6 billion in cash and just $1.8 billion in debt. When you subtract the debt from cash and divide by the amount of shares, Humana has net cash of $4.33 billion or $25 a share in cash. That's impressive. The company doesn't provide a dividend so its' for growth investors, but with a PE of just 6 and the stock trading just above book value, the risk to reward and capital appreciation potential looks very good.