Humana (HUM)

Health insurance company Humana (NYSE:HUM) met Wall Street’s revenue expectations in Q1 CY2025, with sales up 8.4% year on year to $32.11 billion. The company’s full-year revenue guidance of $127 billion at the midpoint came in 0.7% above analysts’ estimates. Its GAAP profit of $10.30 per share was 3.4% above analysts’ consensus estimates.

Company Overview

With over 80% of its revenue derived from federal government contracts, Humana (NYSE:HUM) provides health insurance plans and healthcare services to approximately 17 million members, with a strong focus on Medicare Advantage plans for seniors.

Upfront premiums collected by health insurers lead to reliable revenue, but profitability ultimately depends on accurate risk assessments and the ability to control medical costs. Health insurers are also highly sensitive to regulatory changes and economic conditions such as unemployment. Going forward, the industry faces tailwinds from an aging population, increasing demand for personalized healthcare services, and advancements in data analytics to improve cost management. However, continued regulatory scrutiny on pricing practices, the potential for government-led reforms such as expanded public healthcare options, and inflation in medical costs could add volatility to margins. One big debate among investors is the long-term impact of AI and whether it will help underwriting, fraud detection, and claims processing or whether it may wade into ethical grey areas like reinforcing biases and widening disparities in medical care.

Humana's main competitors include UnitedHealth Group (NYSE: UNH), CVS Health's Aetna (NYSE: CVS), Cigna Group (NYSE: CI), Elevance Health (formerly Anthem) (NYSE: ELV), and Centene Corporation (NYSE: CNC). In the Medicare Advantage space specifically, UnitedHealth's UnitedHealthcare and CVS Health's Aetna are Humana's strongest competitors.

Larger companies benefit from economies of scale, where fixed costs like infrastructure, technology, and administration are spread over a higher volume of goods or services, reducing the cost per unit. Scale can also lead to bargaining power with suppliers, greater brand recognition, and more investment firepower. A virtuous cycle can ensue if a scaled company plays its cards right.

With $120.3 billion in revenue over the past 12 months, Humana is one of the most scaled enterprises in healthcare. This is particularly important because health insurance providers companies are volume-driven businesses due to their low margins.

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Thankfully, Humana’s 12.2% annualized revenue growth over the last five years was solid. Its growth surpassed the average healthcare company and shows its offerings resonate with customers, a great starting point for our analysis.

Long-term growth is the most important, but within healthcare, a half-decade historical view may miss new innovations or demand cycles. Humana’s annualized revenue growth of 12.1% over the last two years aligns with its five-year trend, suggesting its demand was predictably strong.

We can better understand the company’s revenue dynamics by analyzing its number of customers, which reached 14.84 million in the latest quarter. Over the last two years, Humana’s customer base averaged 3.4% year-on-year declines. Because this number is lower than its revenue growth, we can see the average customer spent more money each year on the company’s products and services.

This quarter, Humana grew its revenue by 8.4% year on year, and its $32.11 billion of revenue was in line with Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 5% over the next 12 months, a deceleration versus the last two years. This projection doesn't excite us and suggests its products and services will see some demand headwinds. At least the company is tracking well in other measures of financial health.

Humana was profitable over the last five years but held back by its large cost base. Its average operating margin of 4% was weak for a healthcare business.

Analyzing the trend in its profitability, Humana’s operating margin decreased by 3.7 percentage points over the last five years. The company’s two-year trajectory also shows it failed to get its profitability back to the peak as its margin fell by 1.6 percentage points. This performance was poor no matter how you look at it - it shows its expenses were rising and it couldn’t pass those costs onto its customers.

This quarter, Humana generated an operating profit margin of 6.3%, up 2.1 percentage points year on year. This increase was a welcome development and shows it was more efficient.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Sadly for Humana, its EPS declined by 6.2% annually over the last five years while its revenue grew by 12.2%. This tells us the company became less profitable on a per-share basis as it expanded due to non-fundamental factors such as interest expenses and taxes.

Diving into the nuances of Humana’s earnings can give us a better understanding of its performance. As we mentioned earlier, Humana’s operating margin improved this quarter but declined by 3.7 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its lower earnings; taxes and interest expenses can also affect EPS but don’t tell us as much about a company’s fundamentals.

In Q1, Humana reported EPS at $10.30, up from $6.11 in the same quarter last year. This print beat analysts’ estimates by 3.4%. Over the next 12 months, Wall Street expects Humana’s full-year EPS of $14.14 to grow 4.1%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Humana has shown mediocre cash profitability over the last five years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 3%, subpar for a healthcare business.

Taking a step back, we can see that Humana’s margin dropped by 2.2 percentage points during that time. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. If the longer-term trend returns, it could signal it’s in the middle of an investment cycle.

Humana broke even from a free cash flow perspective in Q1. This cash profitability was in line with the comparable period last year but below its five-year average. We wouldn’t read too much into it because investment needs can be seasonal, leading to short-term swings. Long-term trends are more important.

Businesses that maintain a cash surplus face reduced bankruptcy risk.

Humana is a profitable, well-capitalized company with $22.14 billion of cash and $13.31 billion of debt on its balance sheet. This $8.83 billion net cash position is 28.2% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

It was good to see Humana provide full-year revenue guidance that slightly beat analysts’ expectations. We were also happy its EPS outperformed Wall Street’s estimates. On the other hand, its customer base missed. Overall, this was still a solid quarter. The stock traded up 5.9% to $274.90 immediately following the results.

Updated: July 10, 2025 at 11:55 PM EDT

Before making an investment decision, investors should account for Humana’s business fundamentals and valuation in addition to what happened in the latest quarter.

There’s plenty to admire about Humana. To kick things off, its revenue growth was solid over the last five years. And while its customer momentum declined, its scale gives it meaningful leverage when negotiating reimbursement rates.

Humana’s P/E ratio based on the next 12 months is 15.5x. Looking at the healthcare landscape right now, Humana trades at a pretty interesting price. For those confident in the business and its management team, this is a good time to invest.

Wall Street analysts have a consensus one-year price target of $296.01 on the company (compared to the current share price of $231.50), implying they see 27.9% upside in buying Humana in the short term.