Stock Analysis on Net
Stock Analysis on Net

Humana Inc. (NYSE:HUM)

Present Value of Free Cash Flow to the Firm (FCFF)

Microsoft Excel

In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Free cash flow to the firm (FCFF) is generally described as cash flows after direct costs and before any payments to capital suppliers.

Intrinsic Stock Value (Valuation Summary)

Humana Inc., free cash flow to the firm (FCFF) forecast

US$ in millions, except per share data

Microsoft Excel
Year Value FCFFt or Terminal value (TVt) Calculation Present value at 7.79%
01 FCFF0 3,482
1 FCFF1 3,848 = 3,482 × (1 + 10.53%) 3,570
2 FCFF2 4,161 = 3,848 × (1 + 8.13%) 3,581
3 FCFF3 4,400 = 4,161 × (1 + 5.74%) 3,513
4 FCFF4 4,548 = 4,400 × (1 + 3.35%) 3,368
5 FCFF5 4,591 = 4,548 × (1 + 0.95%) 3,155
5 Terminal value (TV5) 67,767 = 4,591 × (1 + 0.95%) ÷ (7.79% – 0.95%) 46,567
Intrinsic value of Humana Inc. capital 63,755
Less: Debt (fair value) 11,824
Intrinsic value of Humana Inc. common stock 51,931
 
Intrinsic value of Humana Inc. common stock (per share) $430.42
Current share price $327.98

Based on: 10-K (reporting date: 2023-12-31).

1 See details »

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.

Weighted Average Cost of Capital (WACC)

Humana Inc., cost of capital

Microsoft Excel
Value1 Weight Required rate of return2 Calculation
Equity (fair value) 39,572 0.77 9.04%
Debt (fair value) 11,824 0.23 3.60% = 4.63% × (1 – 22.14%)

Based on: 10-K (reporting date: 2023-12-31).

1 US$ in millions

   Equity (fair value) = No. shares of common stock outstanding × Current share price
= 120,653,315 × $327.98
= $39,571,874,253.70

   Debt (fair value). See details »

2 Required rate of return on equity is estimated by using CAPM. See details »

   Required rate of return on debt. See details »

   Required rate of return on debt is after tax.

   Estimated (average) effective income tax rate
= (25.18% + 21.38% + 14.19% + 27.96% + 21.99%) ÷ 5
= 22.14%

WACC = 7.79%

FCFF Growth Rate (g)

FCFF growth rate (g) implied by PRAT model

Humana Inc., PRAT model

Microsoft Excel
Average Dec 31, 2023 Dec 31, 2022 Dec 31, 2021 Dec 31, 2020 Dec 31, 2019
Selected Financial Data (US$ in millions)
Interest expense 493 401 326 283 242
Net income attributable to Humana 2,489 2,806 2,933 3,367 2,707
 
Effective income tax rate (EITR)1 25.18% 21.38% 14.19% 27.96% 21.99%
 
Interest expense, after tax2 369 315 280 204 189
Add: Dividends and dividend equivalents 441 400 364 331 296
Interest expense (after tax) and dividends 810 715 644 535 485
 
EBIT(1 – EITR)3 2,858 3,121 3,213 3,571 2,896
 
Book overdraft 353 298 326 320 225
Short-term debt 1,443 2,092 1,953 600 699
Long-term debt 10,213 9,034 10,541 6,060 4,967
Stockholders’ equity 16,262 15,311 16,080 13,728 12,037
Total capital 28,271 26,735 28,900 20,708 17,928
Financial Ratios
Retention rate (RR)4 0.72 0.77 0.80 0.85 0.83
Return on invested capital (ROIC)5 10.11% 11.67% 11.12% 17.24% 16.15%
Averages
RR 0.79
ROIC 13.26%
 
FCFF growth rate (g)6 10.53%

Based on: 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31).

1 See details »

2023 Calculations

2 Interest expense, after tax = Interest expense × (1 – EITR)
= 493 × (1 – 25.18%)
= 369

3 EBIT(1 – EITR) = Net income attributable to Humana + Interest expense, after tax
= 2,489 + 369
= 2,858

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [2,858 – 810] ÷ 2,858
= 0.72

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 2,858 ÷ 28,271
= 10.11%

6 g = RR × ROIC
= 0.79 × 13.26%
= 10.53%

FCFF growth rate (g) implied by single-stage model

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (51,396 × 7.79% – 3,482) ÷ (51,396 + 3,482)
= 0.95%

where:

Total capital, fair value0 = current fair value of Humana Inc. debt and equity (US$ in millions)
FCFF0 = the last year Humana Inc. free cash flow to the firm (US$ in millions)
WACC = weighted average cost of Humana Inc. capital

FCFF growth rate (g) forecast

Humana Inc., H-model

Microsoft Excel
Year Value gt
1 g1 10.53%
2 g2 8.13%
3 g3 5.74%
4 g4 3.35%
5 and thereafter g5 0.95%

where:
g1 is implied by PRAT model
g5 is implied by single-stage model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5 – g1) × (2 – 1) ÷ (5 – 1)
= 10.53% + (0.95% – 10.53%) × (2 – 1) ÷ (5 – 1)
= 8.13%

g3 = g1 + (g5 – g1) × (3 – 1) ÷ (5 – 1)
= 10.53% + (0.95% – 10.53%) × (3 – 1) ÷ (5 – 1)
= 5.74%

g4 = g1 + (g5 – g1) × (4 – 1) ÷ (5 – 1)
= 10.53% + (0.95% – 10.53%) × (4 – 1) ÷ (5 – 1)
= 3.35%