Why Shares in Humana Inc. Are Soaring Higher

By Markets Fool.com

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

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What: Shares in Humana jumped by 15% earlier today after the Wall Street Journal reported that the company may be up for sale.

So What: Insurers have been consolidating to build scale and leverage membership growth stemming from healthcare reform and aging baby boomers, so it's not a complete shock to learn that a big bidder may be interested in acquiring Humana.

In fact, rumors were swirling that Humana could link up with a larger competitor, such as Aetna, earlier this month.

A buyer like Aetna, or perhaps Cigna, might be interested in acquiring Humana because Humana gets the vast majority of its business from selling Medicare Advantage plans and other Medicare insurance products, such as prescription drug plans.

Although Medicare is the primary driver of Humana's results, the company's membership is also growing thanks to rising Medicaid enrollment and thanks to plans being offered to individuals through the federal and state health insurance exchanges.

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Overall, the addition of 355,100 new Medicare Advantage customers and 209,400 Medicaid members led toHumana reporting that its revenue grew 18% year-over-year to $13.8 billion and that its EPS had jumped 20% to $2.82 in the first quarter.

Now What: There is some debate among analysts whether or not a buyer will emerge for Humana. Humana has an enviable market position in Medicare that is likely to benefit from the fact that 10,000 baby boomers are turning 65 daily, but the company is already trading at an arguably premium valuation.

For that reason, it may be better to focus less on the acquisition rumors and more on the company's business growth. By that measure, Humana remains an intriguing investment. The company expects that membership growth will lead to EPS increasing by 17% this year to between $8.50 and $9, and Wall Street analysts expect that EPS could expand even further to $9.89 in 2016. If Humana can deliver on those forecasts, then it may indeed be worth owning even if a competitor doesn't decide to acquire it.

The article Why Shares in Humana Inc. Are Soaring Higher originally appeared on Fool.com.

Todd Campbell has no position in any stocks mentioned. Todd owns the equity research firm E.B. Capital Markets, LLC. E.B. Capital's clients may have positions in the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.