Humana Stock Gets Merger Spike, but What's It Really Worth?

NEW YORK (TheStreet) -- Health insurance giant Humana (HUM) is seeing a big run up in its stock following reports it might be sold. But analysts are divided over how much the company is actually worth.

Humana shot up more than 20% on Friday after The Wall Street Journal reported the company's interest in a possible sale. That prompted speculation that other health insurance giants like Aetna (AEG) and Cigna (CI) might be possible buyers, while smaller companies like WellCare Health Plans (WCG) and Centene (CNC) could be potential takeover targets as well.

"I think it's very unlikely that the deal won't get consummated," said Ana Gupte, a senior research analyst with Leerink Partners. "I believe that Humana's franchise is very attractive, and the policy environment has become terrific for Medicare."

Humana has a current market value of $32 billion, while Aetna stock is valued at $41 billion and Cigna at $37 billion.

Humana was trading slightly higher Monday at $215 a share. Cantor Fitzgerald reaffirmed a buy rating for the stock and lifted its price target by more than 40%, to $230.

"We are raising out price target to reflect the group's revaluation and HUM's position as the insurer most focused on Medicare Advantage," analysts said. Humana had 3.2 million Medicare Advantage members in the first quarter, compared with 1.4 million for Anthem (ANTM) and 1.2 million for Aetna, the analysts said.

But Sterne Agee is maintaining an underperform rating and a $150 price target for Humana, citing possible antitrust issues with any takeover, as well as earnings guidance that could come in below expectations.

"While our $8.07 estimate [for Humana 2015 earnings per share guidance] is only modestly below the low-end of the company's guidance range of $8.50-$9.00, we can't help but wonder if a more material guidance revision would be driving such potential action be ascribed to management," the firm said in a report.

Sterne admits that the speculation over Humana's stock, as well as its current price of $215, could make the $150 target absurdly low.

"In an era of ultra-low interest rates, making acquisitions financially accretive in strong cash generating businesses is not a high hurdle," the Sterne report said. "However, we note that [Humana] shares are currently trading at about 21x our estimate for HUM's earnings power per share of just north of $10.... We recognize the market is telling us we are very wrong, but at this point the market needs a deal to justify the current valuation."

There's no denying Humana's appeal in the Medicare space, which has led a surge in revenue -- up 20% in the first quarter to $13 billion. More people are enrolling to Humana's mainstay Medicare Advantage offerings, in large part because the federal health care overhaul and a mounting wave of aging Baby Boomers are stoking enrollment figures.

Medicare Advantage and Medicare Part D prescription contracts composed 72% of Humana's first-quarter premiums and service revenues.

Individual Medicare Advantage memberships, which represent the bulk of Humara's Medicare revenue, increased by 11% in the first quarter from the end of 2014 to 2.7 million, and by more than 15% year over year, according to the company's quarterly filing with the SEC.

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