J.P. Morgan’s Medicare Advantage endorsement lifts Humana shares

May 6, 2013, 11:34 AM

By Russ Britt

Shares of Humana Inc. got a lift Monday after J.P. Morgan declared membership in Medicare Advantage plans will keep growing despite pending reimbursement cuts.

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But brokerage analyst Justin Lake also targeted Louisville, Ky.-based Humana HUM +0.04% for upgrade, to “overweight” from “neutral.” He also raised his price target on Humana to $91 a share from $88 a share.

Shares of Humana led the sector into positive ground on an otherwise flat day for stocks, with the company up 3.5% to $76.52.

Lake noted that Humana will see 100 basis points of margin contraction in Medicare Advantage plans over the next two years, but will accelerate again in 2016. Humana has a high proportion of Medicare Advantage patients on its rolls.

“With the stock having underperformed peers meaningfully, we see an increasingly positive risk-reward profile over a multi-year period,” Lake wrote in a note to clients. He says his new price target assumes a price-to-earnings ratio of 11 off his earnings-per-share estimate for 2014.

Lake also gave UnitedHealth Group Inc. UNH +0.35%, another big Medicare Advantage carrier, an initial “overweight” rating. Lake had no rating on UnitedHealth prior to Monday. Shares were up 2% to $60.14.

“Our analysis indicates [UnitedHealth] is best-positioned in our coverage universe from a benefit standpoint heading into [health-care] reform with only 13% of membership ‘at risk’ by our definition,” Lake said.

Lake says that even though there will be reductions in Medicare Advantage reimbursements, those will be more than offset by growth in enrollment due to the value-added proposition that the plan offers seniors.