Clubholding Humana (HUM) reported a mixed but solid third quarter ahead of the opening bell on Wednesday. The early optimism for 2023 also supported our bullish view on the health insurer’s stock. Revenue rose 9% year over year to $22.75 billion, slightly below estimates of $22.76 billion, and adjusted earnings per share rose 42% to $6.88, a beating the estimates of $6.28 per share. Earnings performance was helped by Humana’s benefit expense ratio — also known as the medical loss ratio, or MLR — which came in slightly below expectations at 85.6% versus consensus estimates of 85.7%. Remember, lower is better here. Conclusion It was another strong quarter for Humana. The full-year 2022 guidance was in line with the updated outlook provided at the health insurer’s September investor day. But we got some comments looking ahead to 2023 that pushed the stock up 2% in the bearish market on Wednesday. Medicare Advantage’s (MA) initial individual growth expectations for the next year underpin our positive view going forward, and management cited an 11% to 15% earnings growth expectation, which at the midpoint was — 13% growth or $28.25 – beats the $27.90 the Street had modeled. With Humana’s initial value creation plan of $1 billion officially achieved and management looking to continue improving operating leverage going forward, we continue to like stocks, especially during times of economic slowdown as the health care sector has a negative impact on the spending is a particularly sensitive sector. Given the continued momentum and positive outlook, we are raising our price target from $520 to $595 per share, which is approximately 21 times the median of $28.25 per share in the 2023 implied guidance. While this number represents a slight multiple expansion versus just over 20x forward multiple stock trading, we believe so given the defensive nature of Humana’s business, lack of foreign currency exposure and our continued belief that positive business momentum will allow Closing shares justified the valuation gap with peer company and industry leader and Dow stock UnitedHealth (UNH), which is trading at over 22 times expected earnings. In a year when the S&P 500 lost more than 19%, Humana shares are up over 21% year-to-date. By comparison, UnitedHealth is up only about 9.5% in 2022. In early January, Humana stock took a nosedive after warning of growth at Medicare Advantage. But the company has since flipped its MA business. The club started a position at Humana in April. Third Quarter Segment Results The retail segment, which includes Medicare benefits marketed directly to individuals or through group Medicare accounts, Medicare supplemental accounts, and state contract accounts, saw revenue increase 9.5% year over year to $20.19 billion -Dollars driven by individual Medicare Advantage, member growth into state contracts and higher individual MA premiums per member. The third quarter performance-to-cost ratio was 86.5% for the quarter, down (again, lower is better) from 88.1% for the year-ago period. The expense ratio benefited from higher individual MA premiums per member and lower inpatient utilization rates. These benefits were partially offset by the lower favorable development of the previous period (PPD) in 2022. (Industry terms such as PPD and others throughout this story are defined by Humana in a handy glossary.) Group and specialty segment, which consists primarily of fully insured employer groups commercial medical products and specialty insurance benefits marketed to individuals and groups, saw sales decline by 8.5% to $1.55 billion, primarily due to the expected decline in fully insured commercial medical and commercial ASO memberships, partially offset by higher premiums per member. (ASO stands for administrative services only). The performance/cost ratio in the third quarter improved significantly, falling to 78.7% from 86.4% in the previous year. The improvement is due to a higher mix of specialty products with a lower value-for-money, as well as pricing and performance efforts to combat Covid and improve profitability. Management also highlighted a less severe impact from Covid, thanks to higher vaccination rates compared to the same period last year. The Healthcare Services segment, which includes pharmacy, provider and housekeeping services and other wellbeing services and capabilities, saw revenue increase 10.5% to $8.88 billion. Segment performance was supported by strong individual MA and state contract membership growth, which resulted in higher pharmacy revenue, a positive impact from greater mail-order pharmacy penetration and strength in the company’s provider business. The segment’s operating expense ratio in Q3 – which is operating expenses as a percentage of total revenues less investment income – was 95%, flat from the same period last year but slightly higher than the previous 94.6% in 2022. Outlook Management confirmed its adjustment Full-year 2022 EPS guidance of approximately $25 per share, representing 21% annual growth over 2021 and in line with expectations. As a reminder, this guidance was provided at the company’s Investor Day in September and represents an increase of 25 cents per share over the guidance provided with the July second-quarter earnings release. Also reaffirming management’s earnings target of $37 per share in 2025. Looking ahead next year, management said it expects full-year 2023 Medicare Advantage individual growth from 325,000 to 400,000 members. This represents an expected growth rate of 7.1% to 8.7% and is in line with management’s expectation for high-single-digit percentage growth for the industry. As for earnings, management reiterated its expectation of growing earnings in 2023 at a rate in line with its long-term range of 11% to 15%, although more details will follow upon the release of its fourth (current) quarter results to be announced. and incorporating a conservative element – management believes the current 2023 estimate of $27.90 per share of earnings (representing 11.6% annual growth) will be in line with its initial adjusted EPS guidance. As we emphasized on the bottom line, the midpoint of that growth rate would bring full-year 2023 earnings per share to $28.25. Value Creation Plan During the conference call, management commented that while they have achieved their formal value creation target of $1 billion, they remain committed to continually improving operational leverage. Capital Allocation Humana did not repurchase any shares during the quarter, bringing the number of shares repurchased year-to-date to approximately 2.43 million at an average price of $411.32. The Company currently has $2 billion remaining under its approval. On Oct. 27, Humana’s board of directors declared a cash dividend to shareholders of nearly 79 cents per share, payable on Jan. 27, 2023. The stock offers a 0.56% annual dividend yield at current levels. (Jim Cramer’s Charitable Trust is long HUM. For a full list of stocks, click here.) As a subscriber to CNBC Investing Club with Jim Cramer, you’ll receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling any stock in his charitable foundation’s portfolio. When Jim spoke about a stock on CNBC television, he waits 72 hours after the trade alert is issued before executing the trade. THE ABOVE INVESTMENT CLUB INFORMATION IS GOVERNED BY OUR TERMS AND CONDITIONS AND PRIVACY POLICY ALONG WITH OUR DISCLAIMER. NO OBLIGATION OR OBLIGATION SHALL BE OR CREATED BY YOUR RECEIVING OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. 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Clubholding Humana (HUM) reported a mixed but solid third quarter ahead of the opening bell on Wednesday. The early optimism for 2023 also supported our bullish view on the health insurer’s stock.