Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. Â This isÂ best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another companyÂ or by reviewing theÂ 5 Undervalued Companies for the Defensive Investor Near 52 Week Lows.Â By using theÂ ModernGraham methodÂ one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. Â What follows is a specific look at how WellPoint Inc. (WLP)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â WellPoint, Inc. (WellPoint) is a health benefit company in terms of medical membership in the United States. The Company manages its operations through three segments: Commercial, Consumer, and Other. The Company is an independent licensee of the Blue Cross and Blue Shield Association (BCBSA), an association of independent health benefit plans. The Company offers a spectrum of network-based managed care plans to the large and small employer, individual, Medicaid and senior markets. Its managed care plans include preferred provider organizations (PPOs); health maintenance organizations (HMOs); point-of-service plans (POS) plans; traditional indemnity plans and other hybrid plans, including consumer-driven health plans (CDHPs); and hospital only and limited benefit products. In February 2014, WellPoint sold its online contact lens retail subsidiary 1-800 CONTACTS to private equity firm Thomas H. Lee Partners.
Defensive Investor – must pass all 6 of the following tests: Score = 5/6
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Earnings Stability – positive earnings per share for at least 10 straight years -Â PASS
- Dividend Record – has paid a dividend for at least 10 straight years – FAIL
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period -Â PASS
- Moderate PEmg ratio – PEmg is less than 20 – PASS
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS
Enterprising Investor – must pass all 3Â of the following tests or be suitable for a defensive investor: Score = 3/3
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend -Â PASS
- Earnings growth – EPSmg greater than 5 years ago -Â PASS
|MG Opinion||Fairly Valued|
|Value Based on 3% Growth||$118.57|
|Value Based on 0% Growth||$69.51|
|Market Implied Growth Rate||2.24%|
Balance Sheet – 3/31/2014
Earnings Per Share
Earnings Per Share – ModernGraham
WellPoint Inc. qualifiesÂ for Enterprising Investors but not for Defensive Investors. Â The Defensive Investor is concernedÂ with the short dividend record, but the company passes all of the requirements for the Enterprising Investor. Â As a result, Enterprising InvestorsÂ following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities through a review ofÂ ModernGraham’s valuation of UnitedHealth Group (UNH) and ModernGraham’s valuation of Cigna Corporation (CI). Â From a valuation side of things, the company appears to be fairlyÂ valued after growing its EPSmg (normalized earnings) from $6.96 in 2010 to an estimated $8.18 for 2014. Â This level of demonstrated growth supportsÂ the market’s implied estimate of 2.24% earnings growth and leads the ModernGraham valuation model, which is based on one of Benjamin Graham’s formula, to return an estimate of intrinsic valueÂ within a margin of safety relative toÂ the market price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. Â What do you think? Â What value would you put on WellPoint Inc. (WLP)? Â Where do you see the company going in the future? Â Is there a company you like better? Â Leave aÂ comment on ourÂ Facebook pageÂ or mentionÂ @ModernGrahamÂ on Twitter to discuss.
Disclaimer: Â The author did not hold a position in WellPoint Inc. (WLP) or any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.
Logo taken from wikipedia; this article is not affiliated with the company in any manner.