Aetna Inc. Quarterly Valuation – July 2014 $AET

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 5 Highest Dividend Yields Among Undervalued Companies for the Enterprising Investor.  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 specific look at how Aetna Inc. (AET) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): 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 Company’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. AET Chart

AET data by YCharts

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 6/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 - FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years - PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years - PASS
  5. 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 - PASS
  6. Moderate PEmg ratio – PEmg is less than 20 – PASS
  7. 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

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend - PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary

Key Data:

Recent Price $83.18
MG Value $149.85
MG Opinion Undervalued
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
PEmg 15.15
Current Ratio 0.78
PB Ratio 2.08

Balance Sheet – 3/31/2014

Current Assets $11,414,800,000
Current Liabilities $14,581,200,000
Total Debt $7,618,400,000
Total Assets $52,119,000,000
Intangible Assets $12,259,400,000
Total Liabilities $37,815,400,000
Outstanding Shares 357,400,000

Earnings Per Share

2014 (estimate) $6.40
2013 $5.33
2012 $4.81
2011 $5.22
2010 $4.18
2009 $2.84
2008 $2.83
2007 $3.47
2006 $2.96
2005 $2.70
2004 $1.94

Earnings Per Share – ModernGraham

2014 (estimate) $5.49
2013 $4.85
2012 $4.40
2011 $4.03
2010 $3.38
2009 $2.97

Dividend History
AET Dividend Chart

AET Dividend data by YCharts


Aetna is suitable for either the Defensive Investor or the Enterprising Investor. The Defensive Investor’s only concern with the company is the low current ratio and despite the Enterprising Investor’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 ModernGraham’s valuation of UnitedHealth Group Inc. (UNH) and ModernGraham’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 market’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.  What do you think?  What value would you put on Aetna Inc. (AET)? Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in Aetna Inc. (AET) 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.  Logo taken from wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.

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