Aetna Inc. (NYSE:AET) shares are up more than 0.78% this year and recently increased 0.61% or $1.11 to settle at $181.80. Humana Inc. (NYSE:HUM), on the other hand, is up 1.29% year to date as of 01/02/2018. It currently trades at $251.28 and has returned 2.04% during the past week.
Aetna Inc. (NYSE:AET) and Humana Inc. (NYSE:HUM) are the two most active stocks in the Health Care Plans industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect AET to grow earnings at a 10.68% annual rate over the next 5 years. Comparatively, HUM is expected to grow at a 11.87% annual rate. All else equal, HUM’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. , compared to an EBITDA margin of 6.98% for Humana Inc. (HUM). AET’s ROI is 7.40% while HUM has a ROI of 5.40%. The interpretation is that AET’s business generates a higher return on investment than HUM’s.
Cash is king when it comes to investing. AET’s free cash flow (“FCF”) per share for the trailing twelve months was +3.75. Comparatively, HUM’s free cash flow per share was +18.31. On a percent-of-sales basis, AET’s free cash flow was 1.94% while HUM converted 4.81% of its revenues into cash flow. This means that, for a given level of sales, HUM is able to generate more free cash flow for investors.
AET’s debt-to-equity ratio is 0.65 versus a D/E of 0.45 for HUM. AET is therefore the more solvent of the two companies, and has lower financial risk.
AET trades at a forward P/E of 18.12, a P/B of 3.85, and a P/S of 0.97, compared to a forward P/E of 20.78, a P/B of 3.23, and a P/S of 0.67 for HUM. AET is the cheaper of the two stocks on an earnings basis but is expensive in terms of P/B and P/S ratio. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. AET is currently priced at a -6.12% to its one-year price target of 193.65. Comparatively, HUM is -5.73% relative to its price target of 266.56. This suggests that AET is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.50 for AET and 2.10 for HUM, which implies that analysts are more bullish on the outlook for AET.
Risk and Volatility
Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. AET has a beta of 0.59 and HUM’s beta is 0.85. AET’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment.AET has a short ratio of 0.87 compared to a short interest of 2.92 for HUM. This implies that the market is currently less bearish on the outlook for AET.
Humana Inc. (NYSE:HUM) beats Aetna Inc. (NYSE:AET) on a total of 8 of the 14 factors compared between the two stocks. HUM generates a higher return on investment, is more profitable, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, HUM is the cheaper of the two stocks on book value and sales basis, Finally, UNH has better sentiment signals based on short interest.