Medicare Drug Plan Wrong Prescription for Humana Earnings

3/13 - "Humana’s downward revision of guidance reflects a costly Medicare Part D slip-up in a product that consistently challenges actuarial assumptions and produces unanticipated results. Through a combination of poor product design and inadequate pricing, the company has experienced adverse selection within both the Enhanced and Standard Medicare drug plans. While the plans must retain their prices and structure throughout 2008, Humana can make changes for 2009. However, we have lowered both 2008 and 2009 earnings estimates to reflect potential continued adverse selection as the company searches for the right design in his troublesome product."

"Excluding mergers and acquisitions, our current EPS estimates for HUM are $3.97 for 2008 and $4.74 for 2009. This represents 19% EPS growth in 2009...HUM shares trade at approximately 8.6x our 2009 EPS estimate of $4.74. We believe HUM shares merit a forward P/E of 9.9x, which produces a price target of $47. The target multiple is at the low end of HUM’s historical range; however, we believe the near-term valuation outlook is dampened by Medicare Part D and MA political noise."