Sterne Agee CRT Downgrades Humana On 'Guidance Risk'

In a report published Wednesday, Sterne Agee analysts downgraded the rating on

to Underperform, while reducing the price target from $165 to $150. While there is a possibility of Humana being acquired, the analysts believe that an acquisition at the "current elevated levels" is "unlikely."

(rated Buy) acquired

at 10x forward EPS power. The analysts believe that potential acquirers would not be willing to assign "any value to HUM's individual commercial book of business given the losses HUM is absorbing this year." This takes the potential earnings power to around $10 per share. "At the current price this represents over 17x 2016 EPS power, which is a hefty multiple for a 6%-7% top-line growth business," the analysts explained. Humana's premiums rose 19.5 percent y/y in 1Q15, while estimated medical costs increased 19.8 percent. However, paid claims surged 26.0 percent in the quarter, outpacing premium growth by 6.5 percentage points. This "is a wide gap," the analysts said, while adding, "We believe that over time medical costs estimates and paid claims data converge and the risk for HUM is that the estimated medical costs move more towards claims payment levels than vice versa." The EPS estimates for 2015 and 2016 have been reduced from $8.40 to $8.07 and from $9.71 to $9.17, respectively.