The prognosis for

Humana

(HUM) - Get Report

just got even brighter.

The giant health insurer, which caters to the senior market, expects profits to grow by "at least 25%" next year due to expansion of the Medicare program. In the meantime, the company has matched Wall Street expectations for the second quarter and reiterated strong guidance that's well ahead of the consensus estimate for 2005.

"This quarter's results reflect the increasing momentum we are seeing in our Medicare operations, together with solid execution in our other diversified lines of business," says CEO Michael McCallister. "Humana's dedication to the consumer, supported by both innovation and operational diligence, has us well positioned for future growth."

Investors cheered, sending the company's stock up 11% to $44.16 Monday.

During the second quarter, Humana grew revenue by 3% to $3.55 billion as gains in the company's Medicare business more than offset a drop in commercial enrollment. Operating profits jumped 11% to meet the consensus estimate of 51 cents a share.

Looking ahead, Humana expects to report full-year earnings of between $2.23 and $2.25 a share in 2005 and $2.80 a share in 2006. On average, analysts were looking for profits of just $2.12 and $2.49 for those periods instead.

"Given the magnitude of our Medicare opportunity for 2006 and our thorough preparation to take advantage of it," McCallister says, "we are comfortable with our ability to achieve the results we are forecasting today."

Even now, Humana's Medicare business continues to boom. During the latest quarter, revenue from the company's Medicare Advantage program rocketed 41% to $1.09 billion as both enrollment and premiums climbed. That growth helped fuel a 22% jump in government-related profits overall.

Going forward, Humana expects that momentum to continue. The company now believes it will be serving as many as 550,000 Medicare customers -- up from a previous forecast of between 480,000 and 500,000 -- by the end of this year.

Still, Goldman Sachs analyst Matthew Borsch sounded less than surprised.

"As expected," he wrote, "Humana is benefiting from strong enrollment and earnings growth from Medicare Advantage that the company expects will continue and accelerate into next year."

At the same time, however, Borsch noted a slowdown in the company's commercial business line. In the latest quarter, that division weathered a decrease in both revenue and earnings as membership dropped and expenses climbed in an increasingly competitive environment. Moreover, the company now expects commercial enrollment to remain essentially flat for the year.

Borsch foresees similar challenges for the industry overall.

"Humana's forecast for somewhat lower commercial enrollment is consistent with our view that commercial growth targets across the industry are too high in aggregate, increasing the risk of price competition," Borsch wrote. "Not surprisingly, therefore, we are seeing those targets come down (at

WellPoint

(WLP)

,

PacifiCare

( PHS) and Humana) or at least not increase (at

UnitedHealth

(UNH) - Get Report

and

Aetna

(AET)

) and expect that will be the trend over the remainder of 2Q earnings season."

In the meantime, Borsch labeled Humana's latest results as "mixed" and maintained his in-line rating on the stock.

"We continue to expect Humana will benefit disproportionately from Medicare expansion," he wrote. "Humana also remains a candidate for further industry consolidation.

But these defensive characteristics are partly offset by the significant risks we believe Humana faces on the commercial side of the business, as well as the risk to sustainability of government

Medicare-derived earnings."