We are upgrading our recommendation on Humana, Inc. (HUM) from Neutral to Outperform owing to higher Medicare Advantage membership on better-than-expected sales at the end of 2010. This also led to increase in Humana’s 2011 outlook, coupled with the stand-alone Prescription Drug Plan (PDP) offerings during the recently completed 2011 open enrollment period.
Humana posted impressive fourth quarter earnings, surpassing both the Zacks Consensus Estimate and the prior-year earnings, on the back of improved performance in the company’s operations, lower commercial medical cost trends and surplus cash flows generation in 2010, which also resulted in share buybacks.
Further, the launch of Humana Walmart-PDP enhanced the company’s membership in prescription coverage plans and mail-order drug business. Our six-month target price of $76.00 equates to 12.1x our earnings estimate for 2011. This price target implies an expected total return of 20.0% over that period.
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