Insurance Stocks

Humana Inc Valuation – March 2019 #HUM

Company Profile (excerpt from Reuters): Humana Inc. (Humana), incorporated on July 27, 1964, is a health and well-being company. The Company’s segments include Retail, Group and Specialty, Healthcare Services and Individual Commercial. The Retail segment consists of Medicare benefits, as well as individual commercial fully insured medical benefits, including dental, vision, and other supplemental health products. The Group and Specialty segment consists administrative services only (ASO) products. The Healthcare Services segment includes services offered to its health plan members, as well as to third parties, including pharmacy solutions, provider services, home-based services and clinical programs, as well as services and capabilities to manage population health. The Individual Commercial segment includes Individual Commercial products marketed under the HumanaOne brand.

 

Downloadable PDF version of this valuation:

ModernGraham Valuation of HUM – March 2019

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 all 6 of the following tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $36,974,919,627 Pass
2. Earnings Stability Positive EPS for 10 years prior Pass
3. Dividend Record Dividend Payments for 10 years prior Fail
4. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 106.34% Pass
5. Moderate PEmg Ratio PEmg < 20 20.25 Fail
6. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 3.69 Fail
Enterprising Investor; must pass all 3 of the following tests, or be suitable for the Defensive Investor.
1. Earnings Stability Positive EPS for 5 years prior Pass
2. Dividend Record Currently Pays Dividend Pass
3. Earnings Growth EPSmg greater than 5 years ago Pass

 

Stage 2: Determination of Intrinsic Value

EPSmg $13.46
MG Growth Estimate 10.62%
MG Value $400.17
Opinion Undervalued
MG Grade B-
MG Value based on 3% Growth $195.17
MG Value based on 0% Growth $114.41
Market Implied Growth Rate 5.88%
Current Price $272.60
% of Intrinsic Value 68.12%

Humana Inc is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the poor dividend history, and the high PEmg and PB ratios. The Enterprising Investor has no initial concerns. As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Undervalued after growing its EPSmg (normalized earnings) from $7.88 in 2015 to an estimated $13.46 for 2019. This level of demonstrated earnings growth outpaces the market’s implied estimate of 5.88% 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 above the price.

At the time of valuation, further research into Humana Inc revealed the company was trading above its Graham Number of $170.56. The company pays a dividend of $2 per share, for a yield of 0.7% Its PEmg (price over earnings per share – ModernGraham) was 20.25, which was below the industry average of 26.11, which by some methods of valuation makes it one of the most undervalued stocks in its industry.

Humana Inc performs fairly well in the ModernGraham grading system, scoring a B-.

Stage 3: Information for Further Research

Graham Number $170.56
PEmg 20.25
PB Ratio 3.69
Dividend Yield 0.73%
TTM Dividend $2.00
Number of Consecutive Years of Dividend Growth 2

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Most Recent Balance Sheet Figures

Balance Sheet Information 12/1/2018
Long-Term Debt & Capital Lease Obligation $4,375,000,000
Total Assets $25,413,000,000
Intangible Assets $4,142,000,000
Total Liabilities $15,252,000,000
Shares Outstanding (Diluted Average) 137,527,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $17.25
Dec2018 $12.16
Dec2017 $16.81
Dec2016 $4.07
Dec2015 $8.44
Dec2014 $7.36
Dec2013 $7.73
Dec2012 $7.47
Dec2011 $8.46
Dec2010 $6.47
Dec2009 $6.15
Dec2008 $3.83
Dec2007 $4.91
Dec2006 $2.90
Dec2005 $1.87
Dec2004 $1.72
Dec2003 $1.38
Dec2002 $0.83
Dec2001 $0.70
Dec2000 $0.54
Dec1999 -$2.28

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $13.46
Dec2018 $10.97
Dec2017 $9.87
Dec2016 $6.61
Dec2015 $7.88
Dec2014 $7.57
Dec2013 $7.53
Dec2012 $7.12
Dec2011 $6.61
Dec2010 $5.41
Dec2009 $4.56
Dec2008 $3.53
Dec2007 $3.11
Dec2006 $2.05
Dec2005 $1.52
Dec2004 $1.24
Dec2003 $0.74

Recommended Reading:

Other ModernGraham posts about the company

Humana Inc Valuation – June 2018 $HUM
Humana Inc Valuation – Initial Coverage $HUM
Humana Inc Valuation – August 2016 $HUM
Humana Inc Stock Valuation – February 2016 $HUM
Humana Inc. Valuation – October 2015 Update $HUM

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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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