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 – November 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 – February 2016
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 | $35,673,323,997 | Pass | |
| 2. Sufficiently Strong Financial Condition | Current Ratio > 2 | 0.81 | 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 | 94.19% | Pass | |
| 6. Moderate PEmg Ratio | PEmg < 20 | 17.53 | Pass | |
| 7. Moderate Price to Assets | PB Ratio < 2.5 OR PB*PEmg < 50 | 2.30 | Pass | |
| Score | ||||
| 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 | 0.81 | Fail | |
| 2. Sufficiently Strong Financial Condition | Debt to NCA < 1.1 | -2.79 | 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
| EPSmg | $5.91 |
| MG Growth Estimate | 7.00% |
| MG Value | $133.08 |
| Opinion | Fairly Valued |
| MG Value based on 3% Growth | $85.74 |
| MG Value based on 0% Growth | $50.26 |
| Market Implied Growth Rate | 4.52% |
| Current Price | $103.68 |
| % of Intrinsic Value | 77.91% |
Aetna Inc qualifies for both the Enterprising Investor and the more conservative Defensive Investor.  The Defensive Investor is only concerned by the low current ratio, and the Enterprising Investor is willing to overlook concerns regarding the level of debt relative to the current assets because the company meets 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.
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 $5.91 for 2015.  This level of demonstrated earnings growth supports the market’s implied estimate of 4.52% 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
| Net Current Asset Value (NCAV) | -$71.67 |
| Graham Number | $84.84 |
| PEmg | 17.53 |
| Current Ratio | 0.81 |
| PB Ratio | 2.30 |
| Dividend Yield | 0.94% |
| Number of Consecutive Years of Dividend Growth | 5 |
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Useful Links:
| ModernGraham tagged articles | Morningstar |
| Google Finance | MSN Money |
| Yahoo Finance | Seeking Alpha |
| GuruFocus | SEC Filings |
Most Recent Balance Sheet Figures
| Balance Sheet Information | Sep2015 |
| Total Current Assets | $12,347,300,000 |
| Total Current Liabilities | $15,152,100,000 |
| Long-Term Debt | $7,834,000,000 |
| Total Assets | $53,478,400,000 |
| Intangible Assets | $12,388,400,000 |
| Total Liabilities | $37,609,600,000 |
| Shares Outstanding (Diluted Average) | 352,500,000 |
Earnings Per Share History
| Next Fiscal Year Estimate | $7.03 |
| Dec2014 | $5.68 |
| Dec2013 | $5.33 |
| Dec2012 | $4.81 |
| Dec2011 | $5.22 |
| Dec2010 | $4.18 |
| Dec2009 | $2.84 |
| Dec2008 | $2.83 |
| Dec2007 | $3.47 |
| Dec2006 | $2.99 |
| Dec2005 | $2.60 |
| Dec2004 | $3.58 |
| Dec2003 | $1.48 |
| Dec2002 | -$4.29 |
| Dec2001 | -$0.49 |
| Dec2000 | $0.23 |
| Dec1999 | $1.18 |
| Dec1998 | $1.35 |
| Dec1997 | $1.40 |
| Dec1996 | $1.54 |
Earnings Per Share – ModernGraham History
| Next Fiscal Year Estimate | $5.91 |
| Dec2014 | $5.25 |
| Dec2013 | $4.85 |
| Dec2012 | $4.40 |
| Dec2011 | $4.03 |
| Dec2010 | $3.38 |
| Dec2009 | $2.97 |
| Dec2008 | $3.05 |
| Dec2007 | $3.05 |
| Dec2006 | $2.32 |
| Dec2005 | $1.51 |
| Dec2004 | $0.68 |
| Dec2003 | -$0.64 |
| Dec2002 | -$1.27 |
| Dec2001 | $0.41 |
| Dec2000 | $0.95 |
| Dec1999 | $1.24 |
Recommended Reading:
Other ModernGraham posts about the company
Other ModernGraham posts about related companies
Disclaimer:
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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