Illinois Medicaid award shifts focus for Humana stock

Humana (HUM) is back in the spotlight after Illinois selected the insurer to participate statewide in HealthChoice Illinois, a Medicaid managed care program that could reshape how investors view its government business mix.

Humana’s share price has climbed strongly in recent months, with a 24.63% 1 month share price return, a 122.37% 3 month share price return and a 59.58% 1 year total shareholder return. This suggests momentum is rebuilding as investors weigh the Illinois Medicaid award alongside Medicare Advantage rate headlines and the upcoming earnings update.

If this Medicaid news has you rethinking healthcare exposure, it can be useful to scan other opportunities in the space using our screener for 39 healthcare AI stocks

With Humana trading at US$376 against an analyst price target of US$304.33 and a modelled intrinsic discount of 61.48%, investors now face a key question: is there still mispricing here, or has the market already priced in future growth?

Price-to-Earnings of 39.9x: Is it justified?

Humana is being valued at a P/E of 39.9x, and that sits against a last close of $376 and strong share price momentum over the past year.

P/E compares the current share price to earnings per share, so a higher multiple often reflects investors expecting stronger profit growth relative to current earnings power.

For Humana, the data points in two directions at once. On one side, earnings are expected to grow significantly at around 27% per year, which could help explain why the estimated fair P/E of 42.2x sits above the current 39.9x level. On the other side, reported earnings have declined 19.7% per year over the past 5 years, profit margins sit at 0.8% versus 1.4% a year ago, and return on equity is currently 6.1% with forecasts of 11.6% in three years, which the model classes as low.

When set against that, Humana’s 39.9x P/E is expensive compared with both the US Healthcare industry average of 23.6x and the peer average of 34.4x. This implies the market is paying a premium that assumes the earnings rebound materializes and margins improve from current compressed levels.

Result: Price-to-Earnings of 39.9x (OVERVALUED)

However, Humana’s Illinois win still carries risks, including pressure on already thin 0.8% profit margins and potential scrutiny if future earnings do not match premium P/E expectations.

Another view on Humana’s value

Against that premium P/E story, Humana looks very different under the SWS DCF model. This model places fair value at about $976.16 per share versus the current $376. On this view the stock screens as deeply undervalued. The question is which lens should carry more weight in your process?

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out Humana for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover 43 high quality undervalued stocks. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Next Steps

If this mix of strong share price momentum, rich P/E and contrasting fair value models around Humana leaves you unsure, use the underlying numbers, risk flags and upside signals to test the thesis yourself and move quickly while the story is still evolving. You can start with the 2 key rewards and 2 important warning signs.

Looking for more investment ideas beyond Humana?

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• Target potential mispricing early by scanning a curated list of quality companies through the 43 high quality undervalued stocks.
• Strengthen your downside protection by zeroing in on companies with robust finances using the solid balance sheet and fundamentals stocks screener (48 results).
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.