Standing out among the Street's worst performers today is Humana, a medical specialities company whose shares slumped -11.1% to a price of $359.58, not far from its average analyst target price of $377.39.
The average analyst rating for the stock is buy. HUM lagged the S&P 500 index by -13.0% so far today and by -36.8% over the last year, returning -16.4%.
Humana Inc., together with its subsidiaries, provides medical and specialty insurance products in the United States. The company is categorized within the healthcare sector. The catalysts that drive valuations in this sector are complex. From demographics, regulations, scientific breakthroughs, to the emergence of new diseases, healthcare companies see their prices swing on the basis of a variety of factors.
Humana's trailing 12 month P/E ratio is 22.2, based on its trailing EPS of $16.22. The company has a forward P/E ratio of 17.7 according to its forward EPS of $20.31 -- which is an estimate of what its earnings will look like in the next quarter. As of the second quarter of 2024, the average Price to Earnings (P/E) ratio for US health care companies is 27.61, and the S&P 500 has an average of 28.21. The P/E ratio consists in the stock's share price divided by its earnings per share (EPS), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.
To better understand HUM’s valuation, we can divide its price to earnings ratio by its projected five-year growth rate, which gives us its price to earnings, or PEG ratio. Considering the P/E ratio in the context of growth is important, because many companies that are undervalued in terms of earnings are actually overvalued in terms of growth.
Humana’s PEG is 14.67, which indicates that the company is overvalued compared to its growth prospects. Bear in mind that PEG ratios have limits to their relevance, since they are based on future growth estimates that may not turn out as expected.
To deepen our understanding of the company's finances, we should study the effect of its depreciation and capital expenditures on the company's bottom line. We can see the effect of these additional factors in Humana's free cash flow, which was $2.98 Billion as of its most recent annual report. The balance of cash flows represents the capital that is available for re-investment in the business, or for payouts to equity investors as dividends. The company's average cash flow over the last 4 years has been $3.02 Billion and they've been growing at an average rate of -0.5%. HUM's weak free cash flow trend shows that it might not be able to sustain its dividend payments, which over the last 12 months has yielded 0.9% to investors. Cutting the dividend can compound a company's problems by causing investors to sell their shares, which further pushes down its stock price.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (its share price divided by its book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method. Humana's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 2.69, but is still below the average P/B ratio of the Health Care sector, which stood at 3.69 as of the second quarter of 2024.
Humana is likely overvalued at today's prices because it has a Very low P/E ratio, a lower P/B ratio than its sector average, and positive cash flows with a flat trend. The stock has mixed growth prospects because of its weak operating margins with a stable trend, and an inflated PEG ratio. We hope this preliminary analysis will encourage you to do your own research into HUM's fundamental values -- especially their trends over the last few years, which provide the clearest picture of the company's valuation.
