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Profits Hearty at Humana

The company easily exceeds targets, though that's largely due to a tax boost. Shares slip.

OKLAHOMA CITY --

Humana

(HUM) - Get Humana Inc. (HUM) Report

has blown past Wall Street targets again, thanks to its booming Medicare business and some non-operating gains.

The giant health maintenance organization reported Monday that its fourth-quarter profits jumped 57% to $243 million, due in large part to a lower tax rate and gains from an asset sale.

Earnings per share of $1.43 came in 11 cents above analysts' target, and exceeded Humana's own guidance of $1.27 to $1.32.

Meanwhile, although revenue growth slowed a bit from earlier periods, it still rose 12% to $6.34 billion and easily beat analysts' average estimate of $6.22 billion.

"Our 2007 results show that Humana's unique value proposition resonates deeply with America's seniors," Humana CEO Michael McCallister boasted on Monday. "Treating members as actively engaged healthcare consumers instead of passive healthcare users is what we do across all lines of our business, and accounts for Humana's across-the-board growth and success."

Less than a month after reiterating its 2008 guidance -- and fueling a rally in its shares -- Humana has again raised the bar. The company now expects to post full-year earnings of $5.35 to $5.55 a share, up a nickel from recent projections due to its lower tax rate.

But investors, spoiled by upside surprises, hoped for new operational improvements as well. They pushed shares of Humana down 2.9% to $79.50 in early trading.

Still, Humana offered plenty of good news. The company's core Medicare business, which accounts for more than two-thirds of overall earnings, remains a real bright spot.

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That division saw profits surge 63% during the latest quarter, as growth in the company's lucrative Medicare Advantage business offset some erosion in its Medicare Part D base. Thanks to a more normalized claims pattern in the Part D business, which covers prescription drugs for seniors, the division's all-important benefit expense ratio showed improvement -- falling 3.6% to 80.1% -- and helped the bottom line as well.

Medicare Advantage membership rose 14% from a year earlier to 1.14 million as of Dec. 31.

Meanwhile, Humana continued to expand its Medicare business after the quarter closed. The company added 100,000 Medicare Advantage members during the month of January alone. In order to meet its 2008 targets, the company needs to add just 100,000 to 150,000 more MA customers throughout the remainder of the year.

In contrast, Humana's smaller commercial division posted only modest gains. There, membership increased just 5% and profits barely rose at all. Costs remained under control, however, as the company maintained a disciplined growth strategy.

Goldman Sachs analyst Matthew Bosch felt pleased with Humana's performance overall. He noted that the company had beaten his MA enrollment target for the quarter while posting better-than-expected benefit ratios for both sides of its business.

"While a lower tax rate drove most of the 4Q upside, the results appear overall high quality," Borsch wrote on Monday morning. "We expect the market will respond positively to the strong 4Q results and improved visibility on strong 2008 results" as well.

Borsch was urging investors to buy Humana's stock even before the company's bullish update. Last month, he raised both his EPS and price targets for the company in anticipation of yet another stellar year.

Despite political risks, including potential MA cuts under a new president, Borsch views Humana as a relatively safe bet in the fiercely competitive health insurance space.

Borsch, for one, sees no major MA cuts until 2010 at the earliest. He believes that Humana will continue to profit handsomely in the meantime.

There is a "building realization that the MA program is likely to be a long-term vehicle for Medicare cost-containment, even under a potentially Democratic White House and Congress post the elections," Borsch wrote last month. "This is consistent with the thesis we have pushed since 2006, with the Street consensus gradually moving closer to this view."

For now, Borsch's outlook for Humana remains more bullish than most. His $98 price target on Humana's stock ranks as the highest on the Street. Following Monday's positive update, he has placed that target under review and could raise it further still.

Borsch's firm has investment banking ties to Humana. It owns more than $15 million worth of the company's debt as well.