Humana Inc. (HUM) shares have experienced a sharp decline, dropping 30.2% over the past month, closing at $240.03 on Friday. This steep drop has pushed the stock price closer to the lower end of its 52-week range, raising questions about the company’s future prospects. While some investors might see this as a buying opportunity, closer examination reveals significant headwinds for Humana.
The primary driver of the stock’s decline is the recent downgrade in star ratings for Humana’s Medicare Advantage plans. These plans, which generate substantial revenue, have lost their high-quality ratings, reducing the company’s star-rated membership from 94% to around 25%. This has triggered a selloff, wiping out a significant portion of Humana’s market value.
The news of the rating downgrade has not only impacted Humana but has also sent ripples through the broader health insurance sector. The industry is already facing rising medical costs and tighter reimbursements from the government. This latest development further amplifies the pressure on Humana’s profitability.
Adding to the concerns, analysts are downgrading their earnings estimates for Humana, reflecting the negative sentiment surrounding the company. The consensus estimate for 2024 adjusted earnings is currently pegged at $16.12 per share, representing a 38.2% year-over-year decline.
Humana is facing a double whammy of challenges. The anticipated sharp decline in top-rated Medicare Advantage plan enrollments next year is likely to hit the company’s revenue. This decline will also impact its partner network, affecting their revenue depending on payment structures.
Furthermore, Humana is grappling with rising operating expenses. Over the past few years, operating costs have surged significantly, fueled by higher benefits and operating costs. This trend is likely to put further pressure on profit margins.
With senior citizens resuming elective procedures post-pandemic, medical costs are expected to escalate further, adding to Humana’s financial challenges. The company’s rising debt levels are also a cause for concern, with long-term debt reaching $11.7 billion at the end of the second quarter. This represents a 15% increase from the end of 2023.
Humana’s current stock price might appear tempting, but it’s crucial to consider the challenges the company is facing. With declining membership, rising costs, and a bearish outlook, investors should approach HUM stock with caution as it exhibits significant downside potential. The stock is currently trading below key moving averages, further signaling a bearish trend.
The combination of these factors highlights the need for a cautious approach toward HUM stock. Investors should carefully weigh the potential risks before making any investment decisions.
