Humana Stock Gives Every Indication Of Being Fairly Valued
- By GF Value
The stock of Humana (NYSE:HUM, 30-year Financials) gives every indication of being fairly valued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $426.33 per share and the market cap of $55 billion, Humana stock gives every indication of being fairly valued. GF Value for Humana is shown in the chart below.
Because Humana is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth, which averaged 16.2% over the past three years and is estimated to grow 9.03% annually over the next three to five years.
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It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. Humana has a cash-to-debt ratio of 0.51, which is worse than 68% of the companies in Healthcare Plans industry. The overall financial strength of Humana is 5 out of 10, which indicates that the financial strength of Humana is fair. This is the debt and cash of Humana over the past years:
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Humana has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $78.9 billion and earnings of $28.12 a share. Its operating margin is 0.00%, which ranks in the bottom 10% of the companies in Healthcare Plans industry. Overall, the profitability of Humana is ranked 8 out of 10, which indicates strong profitability. This is the revenue and net income of Humana over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Humana is 16.2%, which ranks better than 78% of the companies in Healthcare Plans industry. The 3-year average EBITDA growth rate is 8.2%, which ranks in the middle range of the companies in Healthcare Plans industry.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Humana's return on invested capital is 20.57, and its cost of capital is 6.37. The historical ROIC vs WACC comparison of Humana is shown below:
In closing, the stock of Humana (NYSE:HUM, 30-year Financials) shows every sign of being fairly valued. The company's financial condition is fair and its profitability is strong. Its growth ranks in the middle range of the companies in Healthcare Plans industry. To learn more about Humana stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.
