Buy-Rated Humana at Good Price
Humana, Inc. (HUM) is one of the largest publicly traded health benefit companies in the U.S. and Puerto Rico. We regard the reaction to the recently revised FY08 guidance by the company, following updated projections for the company's FY08 stand-alone PDP segment, as overdone.
Notwithstanding the company's exposure to reimbursement risk through its reliance on Medicare, recent acquisitions such as OSF HealthPlans, and TRICARE's recently issued formal request for proposal to managed care providers, augur well for earnings stability over the long term. We believe the stock is attractive at current levels and move to a Buy recommendation.
The company's new product design has in recent years focused on meeting the demand for greater self determination by employers and members for varying levels of co-payments, deductibles, coinsurance, benefits levels and price. Restructuring initiatives and increased use of technology have streamlined operations and improved operational efficiencies over recent years.
We have valued HUM on a forward price/earnings (P/E) basis, as well as a comparison to similar firms in the managed care sector. Our $52 price target is derived using a P/E multiple of 12.7 times (x) FY08 EPS of $4.10.
Buy Lamar Advertising Shares
Lamar Advertising Company (LAMR) is benefiting from the rebound in pricing for local advertising and a stronger billboard business. Despite increased capital expenditures in the effort to digitize signs, higher expenses related to the recently acquired outdoor advertising assets, and higher interest expense from the increased debt level, free cash flow continues to expand. Interestingly, beneficial owner SPO Advisory Corporation has acquired an additional 1.5 million shares over the last few months, bringing its total holding to 9.5 million shares of the company.
In 2007, financial year annual earnings were $0.47 per diluted share, up 12% from $0.42 in 2006. Net revenues increased 8% to $1.21 billion, driven by strong growth in billboard revenues (+8.7%). The operating margin expanded 189 bps to 18.9% versus 17% in 2006. Total capital expenditures for the year amounted to $220.5 million. Net interest expense increased 43.8% to $162 million from $113 million in 2006, primarily due to a substantial increase in debt level of the company. The company generated a free cash flow of $152 million, up 2.1% from $149 million in 2006.
Concurrent with the earnings release, management provided guidance for the first quarter 2008. Net revenues are expected to be approximately $280 million, representing an increase of approximately 2% on a pro-forma basis. Total capital expenditures are expected to be approximately $200 million in 2008.
Lamar's stock has traded in a wide price-to-cash flow (P/CF) multiple range of 10 to 22 over the last five years.
