Golden Quarter for Humana

Shares rise 3%.
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Humana

(HUM) - Get Report

continues to strike it rich -- and beat Wall Street expectations -- by serving customers in the "golden years" of their lives.

The company saw first-quarter revenue surge 32% to $6.2 billion, topping the consensus estimate, as membership in its popular Medicare Advantage plans rocketed 50% over the past year. Net income did fall 15% to $71.2 million, due to the absence of a year-ago gain, but earnings per share of 42 cents topped analysts' targets by 2 cents.

Looking ahead, Humana now expects to earn $4.10 to $4.25 a share over the course of the full year. Wall Street had been looking for 2007 profits of $4.08 instead.

Humana's stock jumped 3.2% to $67 a share on the news.

Still, Humana's latest report came with a few blemishes. Notably, the company saw costs spike in its giant Medicare unit. This quarter, in fact, favorable trends in the company's commercial division -- which enjoyed a drop in its medical loss ratio -- delivered the upside for a change.

All told, Humana posted a consolidated MLR of 86.8% in the first quarter, with the company's Medicare MLR of 89.3% -- up sharply from 85.6% last year -- causing the deterioration. In contrast, experts noted, the company reported a commercial MLR below 80% for the first time in recent memory.

"The major question of the quarter will likely be a better understanding of Humana's Medicare Advantage MLR in the quarter," CIBC World Markets analyst Carl McDonald wrote on Monday. "We'll be interested in understanding what drove the deterioration.

"Granted, Humana's Medicare rates increased just 1% this year, well below cost trends," he added. "But our understanding is that the company would cut benefits in order to maintain its Medicare margin."

Humana itself blamed the uptick on a seasonal surge in Medicare Part D use, a development that the market has come to expect -- and ultimately forgive -- with increased understanding of the program.

For his part, McDonald remains bullish on the managed care industry overall. He has a sector-perform rating and a $64 price target on Humana's stock. His firm seeks to do business with the companies it covers.

But some have raised serious concerns. Just today, in fact,

The Wall Street Journal

warned of possible cuts to the lucrative Medicare Advantage program -- which could slash Humana's profit growth -- going forward.

Prudential analyst David Shove feels bearish about Humana's prospects as a result.

"Humana's heavy reliance upon favorable government decisions, in our view, raises the risk associated with their earnings power," Shove stated earlier this month. "We still view Medicare Advantage as a high-risk business with a large congressional target on its back."

Shove, therefore, has an underweight rating and a low $50 price target on Humana's stock. His firm has no business ties to the company.