(HUM) Humana Incorporated – Bull of the Day

Humana, Inc.’s (HUM) second-quarter earnings modestly beat the Zacks Consensus Estimate, owing to improved consolidated premiums and ASO fees that also drove the benefit ratio along with improvement in medical and specialty memberships. Humana benefits from the new rule in health care reform, which led to an efficient deployment of capital.

The upcoming AMS acquisition is further expected to enhance the company’s Medicare coverage. Overall, we expect an upside to Humana shares on the basis of higher membership, surplus cash flows generation, favorable prior-period claims development, and higher projected segment earnings.

Our six-month target price of $89.00 equates to 11.6x our earnings estimate for 2011. Combined with the $1.00 per share annual dividend, this target price implies an expected total return of 20.7% over that period. This is consistent with our Outperform recommendation on the shares.

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