Insurance Stocks

Humana Inc Valuation – August 2016 $HUM

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Stocks for Using A Benjamin Graham Value Investing Strategy – August 2016.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Humana Inc (HUM) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Humana Inc. is a health and well-being company. The Company’s segments include Retail, Group, Healthcare Services and Other Businesses. The Retail segment consists of Medicare benefits, marketed to individuals or directly via group accounts, as well as individual commercial fully-insured medical and specialty health insurance benefits, including dental, vision, and other supplemental health and financial protection products. The Group segment consists of employer group commercial fully-insured medical and specialty health insurance benefits, including dental, vision, and other supplemental health and voluntary insurance benefits, as well as administrative services only products. The Healthcare Services segment includes services, such as pharmacy solutions, provider services, home-based services and clinical programs, as well as services and capabilities to advance population health. The Other Businesses segment includes its closed-block long-term care insurance policies.

HUM Chart

HUM data by YCharts

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Downloadable PDF version of this valuation:

ModernGraham Valuation of HUM – August 2016

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass all 6 of the following tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $26,646,298,532 Pass
2. Earnings Stability Positive EPS for 10 years prior Pass
3. Dividend Record Dividend Payments for 10 years prior Fail
4. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 63.13% Pass
5. Moderate PEmg Ratio PEmg < 20 22.19 Fail
6. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 2.49 Pass
Enterprising Investor; must pass all 3 of the following tests, or be suitable for the Defensive Investor.
1. Earnings Stability Positive EPS for 5 years prior Pass
2. Dividend Record Currently Pays Dividend Pass
3. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

HUM value chart August 2016

EPSmg $8.08
MG Growth Estimate 2.04%
MG Value $101.61
Opinion Overvalued
MG Grade C-
MG Value based on 3% Growth $117.18
MG Value based on 0% Growth $68.69
Market Implied Growth Rate 6.84%
Current Price $179.31
% of Intrinsic Value 176.48%

Humana Inc is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the poor dividend history, and the high PEmg ratio. The Enterprising Investor has no initial concerns. As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $7.12 in 2012 to an estimated $8.08 for 2016. This level of demonstrated earnings growth does not support the market’s implied estimate of 6.84% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value below the price.

At the time of valuation, further research into Humana Inc revealed the company was trading above its Graham Number of $118.04. The company pays a dividend of $1.16 per share, for a yield of 0.6% Its PEmg (price over earnings per share – ModernGraham) was 22.19, which was above the industry average of 16.56.

Humana Inc receives an average overall rating in the ModernGraham grading system, scoring a C-.

Stage 3: Information for Further Research

HUM charts August 2016

Graham Number $118.04
PEmg 22.19
PB Ratio 2.49
Dividend Yield 0.65%
TTM Dividend $1.16
Number of Consecutive Years of Dividend Growth 6

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Most Recent Balance Sheet Figures

Balance Sheet Information 6/1/2016
Long-Term Debt & Capital Lease Obligation $3,793,000,000
Total Assets $27,236,000,000
Intangible Assets $3,266,000,000
Total Liabilities $16,362,000,000
Shares Outstanding (Diluted Average) 150,806,000

Earnings Per Share History

Next Fiscal Year Estimate $8.49
Dec2015 $8.44
Dec2014 $7.36
Dec2013 $7.73
Dec2012 $7.47
Dec2011 $8.46
Dec2010 $6.47
Dec2009 $6.15
Dec2008 $3.83
Dec2007 $4.91
Dec2006 $2.90
Dec2005 $1.87
Dec2004 $1.72
Dec2003 $1.38
Dec2002 $0.83
Dec2001 $0.70
Dec2000 $0.54
Dec1999 -$2.28
Dec1998 $0.77
Dec1997 $1.05
Dec1996 $0.07

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $8.08
Dec2015 $7.88
Dec2014 $7.57
Dec2013 $7.53
Dec2012 $7.12
Dec2011 $6.61
Dec2010 $5.41
Dec2009 $4.56
Dec2008 $3.53
Dec2007 $3.11
Dec2006 $2.05
Dec2005 $1.52
Dec2004 $1.24
Dec2003 $0.74
Dec2002 $0.32
Dec2001 $0.09
Dec2000 -$0.13

Recommended Reading:

Other ModernGraham posts about the company

Humana Inc Stock Valuation – February 2016 $HUM
Humana Inc. Valuation – October 2015 Update $HUM
Humana Inc. Valuation – October 2015 Update $HUM
Humana Inc. Analysis – July 2015 Update $HUM
Humana Inc. Quarterly Valuation – April 2015 $HUM

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Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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