Aetna Inc. Valuation – October 2015 Update $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 10 Most Undervalued Companies for the Defensive Investor – September 2015.  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 Aetna Inc. (AET) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Aetna Inc. is a diversified health care benefits company. The Company offers a range of traditional, voluntary and consumer-directed health insurance products and related services. The Company’s operations are conducted in three business segments: Health Care, Group Insurance and Large Case Pensions. The Company’s Health Care segment includes medical, pharmacy benefit management services, dental, behavioral health and vision plans. The Company’s Group Insurance segment’s products consist primarily of Life Insurance Products, Disability Insurance Products and Long-Term Care Insurance Products. The Company’s Large Case Pensions segment manages a variety of retirement products (including pension and annuity products) primarily for tax-qualified pension plans. The Company’s customers include employer groups, individuals, college students, part-time and hourly workers, health plans, health care providers, Governmental units, Government-sponsored plans, labor groups and expatriates.


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Downloadable PDF version of this valuation:

ModernGraham Valuation of AET – October 2015

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 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $39,084,494,879 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 0.82 Fail
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 96.02% Pass
6. Moderate PEmg Ratio PEmg < 20 18.62 Pass
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 2.54 Pass
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 0.82 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 -2.78 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

AET value Chart October 2015

EPSmg $5.97
MG Growth Estimate 7.21%
MG Value $136.87
Opinion Fairly Valued
MG Value based on 3% Growth $86.57
MG Value based on 0% Growth $50.75
Market Implied Growth Rate 5.06%
Current Price $111.15
% of Intrinsic Value 81.21%

Aetna Inc. qualifies for both the Defensive Investor and the Enterprising Investor.  The Defensive Investor is only concerned with the low current ratio.  The Enterprising Investor is satisfied because the company passes the more stringent Defensive Investor requirements.  As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company.

As for a valuation, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $4.03 in 2011 to an estimated $5.97 for 2015.  This level of demonstrated earnings growth supports the market’s implied estimate of 5.06% 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 within a margin of safety relative to 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.

Stage 3: Information for Further Research

AET Charts October 2015

Net Current Asset Value (NCAV) -$74.54
Graham Number $84.62
PEmg 18.62
Current Ratio 0.82
PB Ratio 2.54
Dividend Yield 0.85%
Number of Consecutive Years of Dividend Growth 5



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Most Recent Balance Sheet Figures

Total Current Assets $12,982,100,000
Total Current Liabilities $15,801,500,000
Long-Term Debt $7,840,100,000
Total Assets $54,641,100,000
Intangible Assets $12,458,000,000
Total Liabilities $39,234,500,000
Shares Outstanding (Diluted Average) 352,200,000

Earnings Per Share History

Next Fiscal Year Estimate $7.20
Dec14 $5.68
Dec13 $5.33
Dec12 $4.81
Dec11 $5.22
Dec10 $4.18
Dec09 $2.84
Dec08 $2.83
Dec07 $3.47
Dec06 $2.99
Dec05 $2.60
Dec04 $3.58
Dec03 $1.48
Dec02 -$4.29
Dec01 -$0.49
Dec00 $0.23
Dec99 $1.18
Dec98 $1.35
Dec97 $1.40
Dec96 $1.54
Dec95 $0.55

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $5.97
Dec14 $5.25
Dec13 $4.85
Dec12 $4.40
Dec11 $4.03
Dec10 $3.38
Dec09 $2.97
Dec08 $3.05
Dec07 $3.05
Dec06 $2.32
Dec05 $1.51
Dec04 $0.68
Dec03 -$0.64
Dec02 -$1.27
Dec01 $0.41
Dec00 $0.95
Dec99 $1.27

Recommended Reading:

Other ModernGraham posts about the company

The Best Companies of the Insurance Industry – October 2015
The 20 Best Stocks For Value Investors This Week – 7/25/15
Aetna Inc. Analysis – July 2015 Update $AET
Aetna Inc. Annual Valuation – 2015 $AET
Aetna Inc. Quarterly Valuation – January 2015 $AET

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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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