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 Highest Dividend Yields Among Undervalued Companies for the EnterprisingÂ Investor.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 Aetna Inc. (AET)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â Aetna Inc. (Aetna), is a diversified healthcare benefits company. The Company offers a range of traditional and consumer-directed health insurance products and related services, including medical, pharmacy, dental, behavioral health, group life and disability plans, medical management capabilities, Medicaid healthcare management services and health information exchange technology services. The Companyâ€™s operations are conducted in three business segments: Health Care, Group Insurance and Large Case Pensions. Its customers include employer groups, individuals, college students, part-time and hourly workers, health plans, healthcare providers, governmental units, government-sponsored plans, labor groups and expatriates. In April 2014, Aetna Inc completed the acquisition of United Kingdom based InterGlobal.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 6/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 -Â FAIL
- 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 -Â PASS
- 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 at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
- 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 – PASS
|Value Based on 3% Growth||$79.62|
|Value Based on 0% Growth||$46.68|
|Market Implied Growth Rate||3.32%|
|Net Current Asset Value (NCAV)||-$73.87|
Balance Sheet – 3/31/2014
Earnings Per Share
Earnings Per Share – ModernGraham
Aetna is suitable for either the Defensive Investor or the Enterprising Investor. The Defensive Investorâ€™s only concern with the company is the low current ratio and despite the Enterprising Investorâ€™s concerns with the level of debt relative to the current assets, the company qualifies for the investor type by default. As a result, value investors 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 such as through a review of ModernGrahamâ€™s valuation of UnitedHealth Group Inc. (UNH) and ModernGrahamâ€™s valuation of Cigna Corp (CI). As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $2.03 in 2010 to an estimated $3.20 for 2014. This level of demonstrated growth outpaces the marketâ€™s implied estimate of 1.22% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value well above the 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 onÂ Aetna Inc. (AET)? 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 authorÂ did not hold aÂ position inÂ Aetna Inc. (AET)Â or in 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. Â Logo taken from wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.