HUMANA INC (HUM) stock intrinsic value fair value estimate & owner earnings analysis

Humana is the second-largest Medicare Advantage insurer in the United States, covering about 5.2 million individual Medicare Advantage members at the end of 2025 and roughly 6.45 million by June 2026 after a 25% enrollment jump for 2026. About 83% of 2025 premiums and services revenue came from contracts with the federal government, and its Florida Medicare Advantage contracts alone were 14%. It also runs Medicare drug plans, state Medicaid plans, CenterWell senior primary care clinics, CenterWell Pharmacy and home health services. Profit depends on three things it only partly controls: the annual government payment rate, its Star Ratings (plans rated 4 stars or higher earn quality bonus payments), and how much its members use medical care. How we measured earnings. We start from operating cash flow, remove the swings in working capital (claims payable, receivables and similar timing items), subtract stock compensation as a real cost, and subtract the capital spending needed to keep the business running. On that basis, owner earnings per share were about $17 to $22 in 2017-2020 and 2022-2023, dipped to $10 in 2021, and were $16.85 in 2024 and $16.98 in 2025. Before interest, the figure we value, 2024 was $21.68 and 2025 was $22.17 per share, up 2.3%. Two judgements matter here. First, 2025 operating cash flow was only $921 million because of a $1.8 billion working-capital outflow, mostly a build in other assets. We treated that as timing, not lost earnings, and first-half 2026 operating cash flow of $3.2 billion against $1.6 billion a year earlier supports that. Second, capital spending fell to about $550 million a year in 2024-2025, well below depreciation of roughly $800-900 million and below the ten-year average of about 1% of revenue. We kept the reported figure in the earnings history but allow for some catch-up in the cases below. The level we start from. Results before 2024 are not a fair guide. Since then, the government's revised risk-adjustment model has been phased in (fully in 2026), drug-plan costs were redesigned in 2025, and medical use has stayed high. The 2024-2025 earnings of about $22 per share before interest also included full Star bonuses that have since been lost. Only about 25% of members were in 4-star-or-better plans for the 2026 bonus year and about 20% for 2027, down from 94% for the 2025 bonus year. Humana's lawsuit to overturn the 2025 ratings has not restored them. In its July 2026 results, management cut its full-year 2026 guidance to at least $6.52 of GAAP earnings per share. By our own estimate, 2026 earnings before interest come to roughly $16 per share, about 28% below 2025. Against the 2.3% growth actually achieved in 2025, our base case assumes that decline in 2026 and starts 2027 at only $17, because the lost bonuses for 2026 and 2027 are already set. Base case ($152 per share). Earnings recover to $18.50 per share in 2028 and settle at about $19 per share before interest. That is below the 2024-2025 level and reflects a partial return of Star bonuses plus the 2026 enrollees maturing to normal margins, offset by about 600,000 members (8%) in plans being exited for 2027, of whom Humana expects to keep about 40%. We give partial credit to Star recovery because Humana kept most members in 4-star plans for about a decade before 2025, but not full credit, because a recovery has not happened yet. Management's goal of a 3% Medicare Advantage margin by 2028 is not counted. That level holds for 20 years on the strength of Humana's scale in a federal program that already covers about half of Medicare beneficiaries, then fades to zero by year 40. The business is worth about $30.7 billion against about $12.3 billion of net debt, leaving $18.4 billion, or about $152 per share. Bear case ($41 per share). Star Ratings stay near today's low levels and the government keeps tightening payment. The 2026 enrollees never reach normal margins, and capital spending has to return toward its historical 1% of revenue. Earnings fall to $14 per share in 2027 and $13 in 2028, then hold near $12 before fading to zero over years 20 to 30. On top of that, the government is appealing, in the Fifth Circuit, a September 2025 court ruling that struck down its 2023 rule letting it extrapolate audit findings to claw back risk-adjustment payments. CMS has said it will audit all eligible contracts and finish its 2018-2024 audits on an accelerated schedule. We charge a $1.5 billion repayment in 2028. Earnings of $12 per share still cover interest about twice. The business is worth about $17.3 billion, owes about $12.3 billion, and is worth about $5.0 billion, or $41 per share, to shareholders. Bull case ($237 per share). Ratings released for the 2028 bonus year restore most members to bonus-eligible plans, as Humana achieved for years before 2025. The large 2026 enrollment class matures, and earnings climb from $18 in 2027 to $22 in 2028 and $25 in 2029, then hold near $26 per share before interest. That is in line with the $24-25 earned in 2022-2023 on a much smaller membership base. It holds for 20 years, then fades by year 40. The business is worth about $40.9 billion, owes about $12.3 billion, and is worth about $28.6 billion, or $237 per share, to shareholders. Debt. At March 31, 2026, Humana had about $14.0 billion of borrowings, including $1.7 billion due within a year. Interest paid was $628 million in 2025. We count only about $1.0 billion of the $1.6 billion of parent-company cash at June 30, 2026 as surplus. The cash and investments held by its insurance subsidiaries back member claims and regulatory capital, and the income they earn is already in our earnings. Because the notes cost roughly 5% against our 6% yardstick, we reduce the debt by about $0.7 billion. Net debt comes to about $12.3 billion, or $102 per share. We treat this corporate debt like any other company's debt rather than as part of the insurance operations, because it funds acquisitions and buybacks, not policy reserves. What changed since our last analysis. Our earlier estimate (base about $86) started from the depressed most recent twelve months and used higher required returns. It also subtracted debt from earnings that were already after interest, while counting subsidiary cash as available to shareholders. We now start from earning power before interest, value it at a fixed 6% rate, and subtract only the debt not already covered by surplus cash. That raises all three cases. The lower Star Ratings for the 2027 bonus year and the plan exits announced for 2027 pull the near-term years down. What would make this wrong: Star Ratings that stay depressed beyond 2027, another year of tight government rates, a large extrapolated audit repayment if the appeal succeeds, or medical cost trends that outrun pricing again.