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 to Research for the Defensive Investor -Â October 2014.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 Humana Inc. (HUM)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â Humana Inc. (Humana) is a health care company. Humana operates in three segments: Retail, Employer Group, and Health and Well-Being Services. The Company offers a range of insurance products and health and wellness services that incorporate an integrated approach to lifelong well-being. As of December 31, 2011, it had approximately 11.2 million members in its medical benefit plans, as well as approximately 7.3 million members in its specialty products. During the year ended December, 31, 2011, 76% of its premiums and services revenue were derived from contracts with the federal government, including 16% related to its Medicare Advantage contracts in Florida with the Centers for Medicare and Medicaid Services (CMS). In August 2012, the Company acquired Harris, Rothenberg International, Inc. In November 2012, the Company acquired Certify Data Systems. In December 2012, the Company acquired Metropolitan Health Networks, Inc.
Defensive Investor – must pass all 6 of the following tests: Score = 5/6
- Adequate Size of Enterprise – market capitalization of at least $2 billion -Â 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 -Â 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 -Â PASS
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 -Â PASS
Enterprising Investor – must pass all 3 of the following tests or be suitable for a defensive investor: Score =Â 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||$109.59|
|Value Based on 0% Growth||$64.24|
|Market Implied Growth Rate||4.36%|
Balance Sheet – 6/30/2014
Earnings Per Share
Earnings Per ShareÂ – ModernGraham
Humana qualifies for the Enterprising Investor but not the Defensive Investor. Â The Defensive Investor is concerned by the company’s short dividend history while the Enterprising Investor has no initial issues with the company. 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. As for a valuation, the company appears to be fairlyÂ valuedÂ after growingÂ its EPSmg (normalized earnings) from $5.41 in 2010 to an estimated $7.56 for 2014. Â This level of demonstrated growth supportsÂ the market’s implied estimate of 4.36%Â earnings growth and leads the ModernGrahamÂ valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value within a margin of safety relative toÂ 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 on Humana Inc. (HUM)? 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 Humana Inc. (HUM)Â orÂ 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.