The private insurance industry’s (XLV) core business involves providing medical risk protection in exchange for predetermined payments. Investors generally use a forward price-to-earnings ratio to compare valuations and determine the best-performing private health insurance company.
The above graph shows that, following the release of Humana’s (HUM) 4Q14 earnings results on February 4, 2015, the company’s forward PE (price-to-earnings) ratio increased. The stock is currently trading at levels similar to UnitedHealth Group (UNH). Humana’s valuations currently exceed those of Anthem (ANTM), Aetna, and Cigna (CI).
Humana’s 4Q14 results failed to meet analysts’ expectations, as the company suffered excessive flu-related expenses for its Medicare patients coupled with high costs related to prescription drug coverage. However, the company’s share price continued to rise after the earnings release. This rise is mainly due to the company’s share buyback programs, which are reducing the total number of outstanding shares and leading to a rise in earnings per share.
In September 2014, Humana’s board of directors authorized a $2 billion share repurchase program, scheduled to expire in December 2016. In 4Q14, Humana purchased 3.8 million shares worth $500 million and purchased a total of 5.7 million shares worth $730 million in 2014. The company is further expected to buy $1.37 billion in shares under the $2 billion share repurchase program. As Humana’s share price has increased on factors other than its core business, this growth in share price may not be sustainable.