One of the best performing stocks in our Large Cap 1000 Screener, which you can register for free here, is Humana Inc (NYSE:HUM).
If you check out the Guru Trades on gurufocus.com you’ll notice that there’s been interest in Humana from some of the biggest names in the investment world.
Humana Inc., together with its subsidiaries, operates as a health and well-being company. The company operates through three segments: Retail, Group, and Healthcare Services.
The Retail segment offers Medicare, and commercial fully-insured medical and specialty health insurance benefits, including dental, vision, and other supplemental health and financial protection products directly to individuals. This segment also has contract with Centers for Medicare and Medicaid Services to administer the Limited Income Newly Eligible Transition prescription drug plan program; and contracts with various states to provide Medicaid, dual eligible, and long-term support services benefits.
The Group segment provides commercial fully-insured medical and specialty health insurance benefits comprising dental, vision, and other supplemental health and voluntary insurance benefits; and administrative services only, and health and wellness products to employer groups. It also offers military services, such as TRICARE South Region contract.
The Healthcare Services segment offers pharmacy solutions, provider services, home based services, clinical programs, and predictive modeling and informatics services to its health plan members, as well as to third parties. The company also provides closed-block long-term care insurance policies.
As of December 31, 2015, Humana had approximately 14.2 million members in medical benefit plans, as well as approximately 7.2 million members in specialty products.
The share price of Humana has been interesting to watch over the past twelve months. The stock has been particularly volatile, but overall is up around 9%. You could have bought shares in the company for $153 on July 19 this year, 26% cheaper that where it is today at $193. I believe there’s still lots more growth to come for Humana.
(Source: Google Finance)
All of the news regarding Humana lately has been around their merger agreement with Aetna.
Humana entered into a definitive merger agreement with Aetna on July 2, 2015 under which, at the closing, Aetna will acquire each outstanding common share of Humana for $125 in cash and 0.8375 of an Aetna common share.
At separate special stockholder meetings both held on October 19, 2015, Humana stockholders approved the adoption of the Aetna merger agreement and Aetna shareholders approved the issuance of the Aetna common stock in the transaction.
The transaction is subject to customary closing conditions, including the expiration of the Hart‐Scott‐Rodino antitrust waiting period and approvals of certain state Departments of Insurance and other regulators.
As permitted under the merger agreement, Aetna and Humana previously agreed to extend the time period to satisfy all necessary closing conditions and close the transaction to December 31, 2016, after which date the merger agreement continues unless terminated by either party.
On July 21, 2016, the U.S. Department of Justice (DOJ) filed a civil antitrust lawsuit alleging that the merger would violate Section 7 of the Clayton Antitrust Act, and seeking a permanent injunction that would prevent the closing of the transaction. The related trial is scheduled to commence on December 5, 2016.
Last week the company released its third quarter 2016 earnings report and stated:
“The company cannot predict when the DOJ litigation will be resolved. Together with Aetna, Humana intends to vigorously defend the transaction in response to the lawsuit.”
“In order to address the DOJ’s perceived competitive concerns regarding Medicare Advantage, on August 2, 2016, the company and Aetna each entered into definitive asset purchase agreements (the Humana APA and the Aetna APA, respectively) to sell for cash to Molina Healthcare, Inc. certain of their respective Medicare Advantage assets.”
“The sale price under the Humana APA and the Aetna APA is approximately $117 million in the aggregate, based on the estimated membership in the plans involved in the transaction. The transactions contemplated by the Humana APA and the Aetna APA remain subject to the completion of Humana’s transaction with Aetna, the resolution of the DOJ litigation, the CMS approvals and actions.”
Latest Earnings Results
Here’s are the highlights of Human’s third quarter 2016 financial results:
- 3Q 2016 earnings per share (EPS) of $2.98 on a GAAP basis, Adjusted EPS of $3.18
- Full‐year 2016 earnings per share guidance of approximately $8.68 on a GAAP basis; Adjusted EPS guidance of approximately $9.50 reiterated
- Medicare Advantage and Healthcare Services businesses performing above expectations
- Individual commercial and Group segment performance in line with management’s expectations
- 3Q 2016 cash flows from operations of $4.50 billion on a GAAP basis, $1.47 billion on an Adjusted basis versus 3Q 2015 cash flows from operations of $1.03 billion (both GAAP and Adjusted)
Real Value on the Balance Sheet
At September 30, 2016, Humana had cash, cash equivalents, and investment securities of $16.37 billion, up $4.47 billion, or 38 percent, from $11.90 billion at June 30, 2016 primarily reflecting the early receipt of the October 2016 Medicare premium remittance of $3.03 billion in September 2016 because the payment date of October 1, 2016 fell on a weekend.
It’s important to note that of the total investment securities, $2.27 Billion are stated as longer term investments so, if we subtract the $2.27 Billion from the total of $16.37 Billion that still leaves $14.4 Billion in cash, cash equivalents, and short term investment securities.
At the same time the company has $300 Million in short term debt and $3.79 Billion in long term debt. When you subtract the total debt ($4.09 Billion) from its cash, cash equivalents, and investment securities of $14.4 billion that leaves Humana with net cash and cash equivalents of $10 Billion.
Loads of Free Cash Flow
A quick look at the statement of cashflows for the past 12 months ending September 30, 2016 shows that Humana had operating cashflows of $5.05 Billion (TTM) and capex of $534 Million (TTM). That means the company has free cash flow totaling $4.51 Billion. In the same period the company paid out dividends of $176 Million and repurchased stock totaling $79 Million. After all of that the company has $6.77 Billion in cash in the bank.
To give you some perspective on the amount of free cash flow that the company generates. If you divide the company’s free cash flow of $4.51 Billion (TTM) by its Enterprise Value $18.8 Billion that means Humana has a staggering FCF/EV yield of 24%.
Valuation
As stated, when you subtract the net cash (cash and cash equivalents minus debt) of $10 Billion from its current market cap of $28.8 Billion, the company has an Enterprise Value of $18.8 Billion or 7 times operating earnings. The company has a very strong balance sheet, loads of free cash flow and an FCF/EV yield of 24%. Humana currently trades on a P/E of 26, a forward P/E of 18, and a Greenblatt earnings yield of 13.6%.
For me, Humana represents great value and a lot of upside.
For all the latest news and podcasts, join our free newsletter here.
Don’t forget to check out our FREE Large Cap 1000 – Stock Screener, here at The Acquirer’s Multiple:
