Humana stock holds Outperform rating at Raymond James despite Stars lawsuit loss

Humana (NYSE:HUM) lost its lawsuit against the Centers for Medicare & Medicaid Services (CMS) regarding its 2025 STAR ratings, which Raymond James estimates will result in a significant $15 EPS headwind in 2026 due to lost bonus payments, affecting approximately 70% of its Medicare Advantage members. Despite this substantial financial impact, including a key plan representing 45% of membership falling to 3.5 stars, analysts like Raymond James and Barclays largely anticipated the outcome, viewing it as a 'clearing event' that could lead to a near-term stock dip but potential recovery. Raymond James maintained its Outperform rating and $340 price target, emphasizing the annual reassessment of STAR ratings and the potential for future EPS recovery, projecting a $26 EPS in 2028 even in a downside scenario.

Analysis

Humana's lawsuit loss against the Centers for Medicare & Medicaid Services (CMS) over its 2025 STAR ratings confirms a significant financial headwind, but one that appears to have been largely anticipated by the market. The ruling will result in an estimated $15 earnings per share (EPS) reduction in 2026 due to lost bonus payments, a substantial impact given Humana's current diluted EPS of $14.16. This downgrade affects approximately 70% of the company's Medicare Advantage members, with a key plan covering 45% of membership falling from 4.5 to 3.5 stars. Despite the negative outcome, analyst commentary from Raymond James and Barclays suggests this was a priced-in event. Raymond James frames it as a "clearing event" that removes uncertainty, maintaining an Outperform rating and a $340 price target. The firm projects a potential short-term stock decline of 0-5% but sees a possible rally as sidelined investors re-engage. Crucially, the ratings are reassessed annually, and Raymond James calculates that a 10% recovery in STAR ratings would add approximately $2.60 to EPS. A downside scenario assuming no ratings improvement still models a $26 EPS for 2028, placing the stock at an attractive ~8x earnings multiple at current levels, suggesting a potential valuation floor.

Key Decisions for Investors

• Investors should recognize that the negative STAR ratings news was widely anticipated and may represent a 'clearing event' that removes a major overhang from the stock, as suggested by Raymond James.
• Monitor the release of the 2026 STAR ratings in October of this year as a primary catalyst, since any tangible improvement could materially reverse the projected 2026 earnings headwind.
• For value-oriented investors, any near-term price weakness could present a buying opportunity, given that the downside valuation case from Raymond James points to a potentially low forward earnings multiple of ~8x for 2028 even with no ratings recovery.