Options Trade – Humana Inc. (HUM)  Friday, March 15, 2013

Growth For Humana With Insurance Reforms!

**OPTION TRADE: Buy the HUM Aug 2013 75.000 call (HUM130817C00075000) at or under $2.30, good for the day. Place a protective stop limit at $1.00 and a pre-determined sell at $4.60.

by Ian Harvey

March 15, 2013

Introduction

Analysts have taken an in-depth look at how all insurers will be affected once President Obama’s health-care overhaul bill takes effect on Jan. 1. It seems that there will be an immediate headwind for diversified managed-care providers and Humana Inc. (NYSE: HUM) will be one company that benefits greatly from this move.

About Humana

Humana Inc. (Humana) is a health care company. Humana operates in three segments: Retail, Employer Group, and Health and Well-Being Services. The Company offers a range of insurance products and health and wellness services that incorporate an integrated approach to lifelong well-being.

As of December 31, 2011, it had approximately 11.2 million members in its medical benefit plans, as well as approximately 7.3 million members in its specialty products. During the year ended December, 31, 2011, 76% of its premiums and services revenue were derived from contracts with the federal government, including 16% related to its Medicare Advantage contracts in Florida with the Centers for Medicare and Medicaid Services (CMS).

In August 2012, the Company acquired Harris, Rothenberg International, Inc.

In November 2012, the Company acquired Certify Data Systems.

In December 2012, the Company acquired Metropolitan Health Networks, Inc.

Key Statistics for HUM

Current P/E Ratio (ttm) 9.0615
Estimated P/E(12/2013) 8.8495
Relative P/E vs. SPX 0.5870
Earnings Per Share (USD) (ttm) 7.6400
Est. EPS (USD) (12/2013) 7.8230
Est. PEG Ratio 0.8777
Market Cap (M USD) 10,987.71
Shares Outstanding (M) 158.71
30 Day Average Volume 2,945,528
Price/Book (mrq) 1.2390
Price/Sale (ttm) 0.2858
Dividend Indicated Gross Yield 1.50%
Cash Dividend (USD) 0.2600
Last Dividend 03/26/2013
5 Year Dividend Growth -
Next Earnings Announcement 05/01/2013

Technical Outlook

S&P estimates operating earnings per share (EPS) will increase to $7.90 in 2013, up from $7.47 in 2012, and looks for $8.50 in 2014. Analysts’ consensus median target is $86, and HUM pays a dividend of $1.04 for a 1.5% yield.

The stock’s all-time high was made in January 2012 at over $96. After six months of declining, it bottomed at just under $60 in July, and proceeded to form a bull channel with current support at $67 and resistance at $81 (the bearish resistance line).

In late February, the 50-day moving average crossed above the 200-day moving average triggering a golden cross, which usually results in a long-term change of trend from negative to positive. The cross was preceded by a possible selling climax in mid-February, and it was followed by a MACD buy signal on Wednesday.

Earnings

Humana last posted its quarterly earnings results on Monday, February 4th. The company reported $1.19 EPS for the quarter, beating the Thomson Reuters consensus estimate of $1.07 by $0.12. The company had revenue of $9.56 billion for the quarter, compared to the consensus estimate of $9.73 billion. During the same quarter in the prior year, the company posted $1.20 earnings per share. The company’s quarterly revenue was up 5.5% on a year-over-year basis. Humana has set its Q1 guidance at $1.75-1.85 EPS. Analysts expect that Humana will post $7.93 EPS for the current fiscal year.

Analyst Outlooks

Humana‘s stock had its “neutral” rating reaffirmed by Zacks in a report released on Tuesday, 5th March, 2013. They currently have a $70.00 target price on the stock.

Zacks‘ analyst wrote, “Humana’s fourth quarter earnings surpassed the Zacks Consensus Estimate but lagged the year-ago results due to lower income in most segments. Moreover, operating cash flow declined due to lower net income. However, both premium and service revenues and investment income improved. Higher membership and lower operating cost ratio were the other positives. In the long term, strategic acquisitions and alliances are enhancing membership, earnings and Medicare coverage. Strong financials and sturdy ratings also boost optimism. However, Humana’s dependence on Medicare Advantage plans, rising expenses, adverse impact of healthcare reform and high competition raise concerns. Overall, we believe the company needs to follow prudent expense management and focus on growth through acquisitions and diversifying its earning sources to attract long-term investors. We maintain a Neutral recommendation on Humana.”

A number of other analysts have also recently weighed in on HUM. Analysts at Barclays Capital reiterated an “overweight” rating on shares of Humana in a research note to investors on Tuesday. They now have an $87.00 price target on the stock. Separately, analysts at Oppenheimer reiterated an “outperform” rating on shares of Humana in a research note to investors on Friday. They now have a $88.00 price target on the stock. Finally, analysts at TheStreet reiterated a “buy” rating on shares of Humana in a research note to investors on Friday.

Analyst Firms Making Recommendations

B OF A M L CANTOR FITZGERA
CITIGROUP CO FORECST
DEUTSCHE BK SEC DOWLING & PARTN
GOLDMAN SACHS J.J.B.HILLIARD
JEFFERIES & CO. JP MORGAN SECUR
LEERINK SWANN OPPENHEIMER HLD
RAYMOND JAMES STIFEL NICOLAUS
WEDBUSH SECURIT WELLS FARGO SEC

Dividend Announcement

The company also recently announced a quarterly dividend, which is scheduled for Friday, April 26th. Shareholders of record on Thursday, March 28th will be paid a dividend of $0.26 per share. This represents a $1.04 annualized dividend and a dividend yield of 1.54%. The ex-dividend date is Tuesday, March 26th.

Hedge Fund Buying

Analyzing the most recent round of 13F filings from hedge funds and other notable investors discloses many of their long equity positions in U.S. stocks as of the end of December. This enables us to see what hedge fund managers' favorite stocks were in a number of categories including those meeting traditional value criteria. Billionaire and Tiger Cub Andreas Halvorsen's Viking Global and his team more than doubled their stake in Humana and owned 3.5 million shares at the end of December.

Conclusion

Humana traded up 0.57% on Thursday, hitting $69.23. Humana has a 1-year low of $59.92 and a 1-year high of $93.36. The stock’s 50-day moving average is currently $74.08. The company has a market cap of $10.680 billion and a price-to-earnings ratio of 8.95.

Therefore, based on the facts above the following options trade is recommended…..


**OPTION TRADE: Buy the HUM Aug 2013 75.000 call (HUM130817C00075000) at or under $2.30, good for the day. Place a protective stop limit at $1.00 and a pre-determined sell at $4.60.



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