One of Wall Street's biggest winners of the day is Humana, a medical specialities company whose shares have climbed 4.8% to a price of $247.1 -- 14.17% below its average analyst target price of $287.9.
The average analyst rating for the stock is buy. HUM may have outstripped the S&P 500 index by 4.0% so far today, but it has lagged behind the index by 69.6% over the last year, returning -45.4%.
Humana Inc., together with its subsidiaries, provides medical and specialty insurance products in the United States. The company is part of the healthcare sector. Healthcare companies work in incredibly complex markets, and their valuations can change in an instant based on a denied drug approval, a research and development breakthrough at a competitor, or a new government regulation. In the longer term, healthcare companies are affected by factors as varied as demographics and epidemiology. Investors who want to understand the healthcare market should be prepared for deep dives into a wide range of topics.
Humana's trailing 12 month P/E ratio is 21.5, based on its trailing EPS of $11.47. The company has a forward P/E ratio of 14.2 according to its forward EPS of $16.84 -- which is an estimate of what its earnings will look like in the next quarter.
The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the third quarter of 2024, the health care sector has an average P/E ratio of 26.07, and the average for the S&P 500 is 29.3.
Humana's financial viability can also be assessed through a review of its free cash flow trends. Free cash flow refers to the company's operating cash flows minus its capital expenditures, which are expenses related to the maintenance of fixed assets such as land, infrastructure, and equipment. Over the last four years, the trends have been as follows:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cash Flow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2023 | 3,981,000 | 1,004,000 | 2,977,000 | -13.71 |
| 2022 | 4,587,000 | 1,137,000 | 3,450,000 | 275.0 |
| 2021 | 2,262,000 | 1,342,000 | 920,000 | -80.32 |
| 2020 | 5,639,000 | 964,000 | 4,675,000 | 2.79 |
| 2019 | 5,284,000 | 736,000 | 4,548,000 | 191.35 |
| 2018 | 2,173,000 | 612,000 | 1,561,000 |
- Average free cash flow: $3.02 Billion
- Average free cash flown growth rate: -0.5 %
- Coefficient of variability (lower numbers indicating more stability): 0.0 %
With its positive cash flow, the company can not only re-invest in its business, it can offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in HUM have received an annualized dividend yield of 1.5% on their capital.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (market value divided by 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 has a P/B ratio of 1.69. This indicates that the market value of the company exceeds its book value by a factor of more than 1, but is still below the average P/B ratio of the Health Care sector, which stood at 3.53 as of the third quarter of 2024.
With a Very low P/E ratio, a lower P/B ratio than its sector average, and positive cash flows with a flat trend, we can conclude that Humana is probably overvalued at current prices. The stock presents mixed growth prospects because of its weak operating margins with a stable trend, and an inflated PEG ratio.
