Humana Inc. (HUM)

Total return at 5 years: 8.1%/year = 7.3% appreciation + 0.8% dividend. The target price ($569) is ex-dividend; the $19 in dividends collected over 5 years are added separately.

By both methods, the value today (DCF $1,000 · Multiples $474) exceeds the market price ($401).

Today — fairly valued: at $401 trades ~15.3% below its value discounted to today (~$474); the discount is positive but does not reach the margin of safety we require (≥38%).

At 5 years — En valor: the target price ($569) plus dividends yield between the 4% floor and the 10% average return — a reasonable return, though without the margin of a great investment.

The bridge: the return at 5 years exceeds the risk-free rate (4.5%) — but the discount does not reach the required margin of safety (≥38%). To require a 15% annual return, it would need to be bought at ~$296.

Educational / informational. Does not constitute investment advice.

The inverse approach: instead of projecting growth to obtain the value, the market price ($401) is taken as given and it solves for what annual owner-earnings growth would need to hold for 5 years for the present value —at the method's rate (4.5%, no-growth terminal)— to equal that price. It is the disconfirmation test: the expectations the price already pays for, contrasted against the method's projection.

The market discounts less growth (-4.2%/year) than we project (16.6%/year) → if the base case holds, there is margin: perception is more pessimistic than the estimated reality.

That growth implies ~$2.1 bn of owner earnings in year 5 (vs ~$5.7 bn of our base case). It recalculates if the DCF assumptions are edited.

Year-by-year projection of the selected scenario. From each year, two versions of the flow are derived: growth FCF (operating flow − total capex, the cash surplus) and maintenance FCF (the owner earnings: what the business yields if it only sustains its capacity). The flow is returned almost in full (dividend + buyback) or redeployed into the operation, so that EV stays roughly flat and multiples compress because the metric grows, not because of cash accumulation. The valuation is done on Ganancias del dueño (P/E normalizado). In edit mode, revenue, margins, capex, and exit multiples can be adjusted.

Year 0 is the TTM rebased to Jun-2026 (FY2025 $129,664M + cumulative 1H26 $80,515M − cumulative 1H25 $64,500M = $145,679M of revenue), incorporating the Jul-29-2026 8-K (2Q26 results) that the XBRL had not yet ingested as of this import's date. Year 1 starts from the company's own current guidance for fiscal 2026 (consolidated revenue of at least US$160,000M, adjusted EPS of at least US$9.00, GAAP EPS cut to "at least US$6.52" from a prior US$8.36) — not from the recent historical trajectory, because guidance is the best information available and takes precedence by rule (§5 R1 previous). Revenue keeps growing strongly (individual Medicare Advantage membership guided at +25% year over year, CenterWell expansion via acquisitions — Villages Health closed Nov-2025, MaxHealth in 1Q26), but the margin does not expand in year 1: it compresses first and only recomposes starting in year 2, in a trough-and-recovery shape (R3 rebound exception), because the company itself guided a 22% cut to 2026 GAAP EPS from the Star Ratings drag of the 2026 bonus year — a known regulatory charge under active litigation (Humana appealed to the 5th Circuit Court of Appeals), not a structural deterioration of the business book. GAAP earnings are also loaded with non-recurring or semi-recurring items: valuation adjustments on put and call options on minority investments, charges from the multiyear transformation program ($449M in 2025, $281M in 2024, $436M in 2023 — recurring in magnitude even if labeled "non-GAAP"), intangible impairments, and business-disposal items. Owner earnings (NOPAT + D&A − maintenance capex − ΔNWC) seek a cleaner read than GAAP net income, which was outright negative in 2H25 (full-year 2025 attributable earnings of $1,188M were lower than the first half of 2025 alone, $1,789M, implying a loss of ~$601M in 2H25). The base exit multiple (15×) sits in the lower half of the managed-care archetype band [14,20×], reflecting a moat the company itself describes as subject to "intense competitive pressure to contain premium pricing" and with no evidence of a widening per-unit cost gap — a direction that is eroding, not widening. Modest net buybacks (~$150M/year, well below the $1,600M of 2023 and $817M of 2024) are modeled at −0.5%/year, identical across all three scenarios (§6). Dividend per share anchored to the current rate ($3.54/share, run-rate of the most recently declared quarterly) with conservative 3% annual growth, given management's focus on preserving capital amid regulatory uncertainty.

Today's elevated multiple is the price of growth: if the business grows, the entry point cheapens on its own going forward (the metric grows while EV stays roughly flat). The exit multiple at 3 years is higher than the terminal at 5 years —at 3 years there is more growth still ahead—, so the value curve shows whether value creation is concentrated in the early or the later years. The required return is applied to the base scenario.

They are valued separately, with their own rationale, and are not incorporated into the base or the verdict (they are excess return). When assigning them value — in Editmode —, the total with optionalities updates live, without moving the base.

The verdict, the base CAGR, and the margin of safety are always calculated on the base; optionalities do not alter them (with optionalities at $0 they do not move).

Each card fixes a required annual return and answers: if the business is worth $569 in 5 years, what is the maximum that can be paid today to obtain that return? Since it now trades at $401, the margin of safety is how much cheaper the market is than that maximum. The three thresholds: 4% covers inflation (the floor), 10% is the long-term average return, and 15% is the level of a great investment.

With a target price of $569 in 5 years plus $19 of dividends collected (the dividend adds to the return, not to the price) and a required return of 4.5% annually, the maximum to pay today is $474. Against the current market price ($401), the margin of safety is 15.3% (trades below the maximum → there is margin) and the total return at that price would be 8.1% annually.

• Current multiple on adjusted EPS. ~44.6x on FY2026 adjusted EPS guidance (US$9.00) — rich for the managed-care archetype [14x-20x].
• Current multiple on GAAP EPS. ~61.5x on FY2026 GAAP EPS guidance (US$6.52) — extremely rich in GAAP terms.
• Position against the 52-week high. Trades just 2% below its 52-week high (US$409.42), after more than doubling from the 52-week low (US$163.67).
• Owner earnings vs. multiple paid. The multiple on TTM owner earnings (US$400.97 / (US$2,661M/121M shares) ≈ 18.2x) is more reasonable than the GAAP P/E, supporting the case that GAAP understates true earnings power.
• Margin of safety today. It trades close to intrinsic value, far from the required margin of safety.
• Implied return vs. the 10% bar. The base case yields +8% over 5 years, above the 10% bar, but with the terminal multiple already in the lower half of the archetype band.
• Verdict sensitivity to the terminal multiple. The result depends materially on the exit multiple not compressing below the band's floor [14x] if the litigation resolution is unfavorable.

Each margin over sales, year by year: historical (solid line) → projection (dotted).

• ✓ ROIC exceeds the cost of capital (~10%)
• ✓ CFROIC backs up the ROIC (134%, cash vs. accruals)
• ✓ Healthy balance sheet (low corporate debt)
• ✓ Durable competitive moat (multiple advantages)

• Cash generation. TTM OCF rebased US$2,539M, with owner earnings estimated at US$2,661M — above GAAP net income (US$1,279M) due to the benefits-payable float.
• ROIC on invested capital. Low invested capital (~US$9-10,600M) relative to the size of the business, thanks to the benefits-payable float — resulting ROIC above the 10% bar.
• GAAP earnings predictability. Low in the short term: 2H25 GAAP earnings were negative (~-US$601M) after a US$1,789M 1H25, and 2026 GAAP guidance was cut 22% in July.
• Quality of non-GAAP adjustments. "Transformation" charges have recurred for three years (2023-2025) at comparable amounts, which calls into question whether they are truly non-recurring.
• Negative working capital (float). Premiums are collected in advance and benefits are paid later; the benefits-payable float is a source of self-funding that reduces net invested capital.
• Accounting distortions. Adjusted (non-GAAP) earnings exclude put/call options on minority investments, intangible amortization, and transformation charges — all real to some degree, not purely accounting items.
• Cash conversion. TTM OCF (US$2,539M) over TTM attributable net income (US$1,279M) implies conversion >100%, consistent with the float of a growing business.

Annual levels from the official filing (10-K); the % over each bar is the year-over-year (YoY) growth vs the prior year.

Humana is a Medicare Advantage insurer: the primary driver is membership (members) × per-capita premium, with the benefit ratio (medical cost / premiums) as the most direct underwriting profitability indicator. Unlike a marketplace (GMV × take rate) or a fintech (loan book × spread), Humana's economics run through CMS risk adjustment: the per-capita payment is calibrated to each member's reported health status, so membership growth and the benefit ratio are not independent — the mix of new members runs, on average, at a higher benefit ratio than retained ones.

The % are the annual (year-over-year) growth: each year —historical and projected— vs the prior one; the TTM (trailing 12m) vs the TTM of a year ago, to avoid overlapping windows. The historicals are exact figures from the official filings; the projected years come from the year-by-year model (the intermediate years without their own series are interpolated between the anchors). The projected columns (+1y…+5y) are 12-month windows counted from the TTM close (30-jun-2026): the projection starts from the most recently reported data, not the fiscal year. The projected base is realistic and unbiased — the risk discount is applied at the end, via the required return. The rationale for each metric is in the (i).

• Revenue growth. TTM +14.1% year over year, with FY2026 guidance of at least US$160,000M (+23% over FY2025), driven by individual MA membership and CenterWell.
• Growth quality. Part of 2026 membership growth is a mechanical recovery from the 2025 decline (planned exits), not net market expansion.
• Earnings growth. Disconnected from revenue growth in the short term: 2026 GAAP guidance falls 22% despite 23% revenue growth.
• Reinvestment runway. CenterWell offers a capital-deployment runway via bolt-on acquisitions (Villages Health, MaxHealth) with deliberate geographic overlap with MA membership.
• Diversification of growth sources. Expansion into Medicaid (new Illinois state contract) diversifies beyond Medicare Advantage, though it remains 100% government.
• Sensitivity to a single regulatory driver. Earnings growth over the next 2-3 years depends materially on two binary litigations with CMS.
• Backlog or contracted revenue. Not applicable: this is a business of annual renewal of government contracts and premiums, not multiyear contracted backlog.

• Revenue recurrence. Premiums contracted annually with government contract renewals already secured for 2026; high revenue predictability, not margin predictability.
• Product differentiation. The filing itself describes the industry as highly price-competitive, without claiming sustained product differentiation.
• Pricing power. Limited: the filing acknowledges intense competitive pressure on premium pricing and members' flexibility to switch plans.
• Operating leverage. The consolidated operating cost ratio improved (11.0%→9.8% year over year in 2Q26) alongside revenue growth, showing some positive scale.
• Recession behavior. Medicare is countercyclical by nature (non-discretionary senior healthcare demand), but the business is sensitive to regulatory shocks like the current one.
• Sector capital cycle. An industry with barriers to entry the company itself characterizes as "not substantial," and with larger-scale competitors in some markets.
• Geographic and product concentration. 93% of revenue depends on government programs; Florida alone accounts for 14% of consolidated revenue.

Not all debt is equal: only the structural needs refinancing; the rest is operational (self-liquidating).

Structural debt is what is exposed to the contraction phase of the cycle; operational debt (leases, matched funding) self-liquidates with the business.

• ✓Leverage (net debt / EBITDA)Net cash $0 bn
• !Interest coverage (EBIT / interest)3.8x
• –Liquidity (current ratio)no data
• ✓Cash quality (CFROIC vs ROIC)CFROIC backs 134% of ROIC
• ✓Value creation (ROIC − 10% bar)+10pp
• ✓Malinvestment test (capex vs incremental ROIC)Capex/D&A 0.9x — no over-investment
• ✓Float / working capitalFrees up cash $0.4 bn (float / negative WC)
• ✓Dilution (SBC % of revenue + shares)SBC 0.2% of revenue

A traffic-light interpreted by the method (not generic): float (negative WC) adds up, capex is judged by incremental ROIC (malinvestment test), and a lender is not subjected to corporate solvency. The (i) shows the derivation of each number.

• Leverage. Debt-to-capitalization 42.7% (Jun-2026), up from 40.7% (Jun-2025) on financing acquisitions via commercial paper.
• Parent-company liquidity. Parent-company cash and equivalents of US$1,590M (Jun-2026), temporarily elevated by the timing of a ~US$1,050M Medicaid state payment that settled shortly after quarter close.
• Days claims payable (DCP). 33.1 days (Jun-2026), down from 36.5 days (Jun-2025) on a lower inventory of processed claims.
• Statutory capital in regulated subsidiaries. US$14,100M of statutory capital against a required minimum of US$6,900M — ample coverage above the regulatory minimum.
• Operating cash flow. TTM OCF rebased at US$2,539M, positive and growing versus the 2025 low (a full-year US$921M), though still volatile quarter to quarter.
• Pre-funded liquidity strengths. Entered into US$1,500M of pre-funded trust arrangements during 2Q26, expanding contingent financial flexibility without affecting reported debt-to-capitalization.

Who owns the shares — the alignment and whether there is a controlling shareholder.

• CEO tenure. James Rechtin took over on Jul-1-2024; less than two years in the role as of this valuation, with broad prior industry experience.
• Recent capital allocation. Buybacks essentially paused (US$151M in 2025 vs US$1,600M in 2023); capital redirected toward CenterWell bolt-on acquisitions.
• Candor about mistakes. The company explicitly communicates the Star Ratings drag and is actively litigating rather than downplaying the issue in its public communications.
• Alignment (skin in the game). Not verifiable with the sources available for this import: the DEF 14A proxy was not available.
• M&A discipline. Acquisitions (Villages Health, MaxHealth) with deliberate geographic overlap with MA membership, consistent with the vertical-integration thesis stated by the company.

• motivated-sellers: 2025 GAAP earnings and 2026 GAAP guidance are depressed by a known and litigated regulatory charge (CMS Star Ratings), not by structural deterioration of the business book — 2H25 had an attributable loss of ~US$601M while 1H25 had earned US$1,789M
• motivated-sellers: recurring restructuring/transformation charges (US$449M in 2025, US$281M in 2024, US$436M in 2023) and impairments (US$253M in 2025) drag down GAAP without necessarily representing an equivalent loss of economic value
• missing-buyers (partial): binary uncertainty from two regulatory litigations (Star Ratings, RADV) discourages investors who prefer to wait for resolution before re-rating the stock to the full multiple

The stock trades just 2% below its 52-week high, so this is not a "nobody's watching" story — the market is already pricing it rich in terms of adjusted EPS (~44x on the US$9.00 guidance). The case for this thesis depends on owner earnings, which also exclude non-economic items, being a more defensible base than depressed GAAP, and on the two pending litigations resolving without worsening the current drag.

The annual return (CAGR at 5 years) in each scenario, with the total period return below — the margin of safety made visual: upside range wide, downside range narrow.

Even in the bear scenario, the return holds at -10%/year (-42% total): the margin of safety protects the downside. The bull (+24%/year, +198% total) exceeds it comfortably — a favorable asymmetry, with a narrow downside range and a wide upside range.

• Star Ratings litigation. Humana lost at the trial-court level (Oct-14-2025) in its attempt to overturn CMS's 2025 ratings; it is appealing with no guarantee of success. A loss on appeal locks in the 2026 quality bonus drag and likely extends it into 2027.
• Risk-adjustment data validation (RADV) litigation. Humana won at the trial-court level (Texas court, Sep-25-2025) against CMS's retroactive rule, but the government appealed (Nov-21-2025, 5th Circuit, pending). Exposes Humana to material retroactive recoupments dating back to 2018.
• Adequacy of benefit reserves. Premiums are set in advance against a cost of care estimated with "considerable inherent variability"; the excess of actual over projected cost is generally not recoverable within the contract year.
• Concentration in government programs. 93% of premium and services revenue comes from Medicare, Medicaid, and military services combined; Florida alone accounts for 14% of consolidated revenue.
• Cybersecurity and third-party / AI dependence. Dependence on third-party providers for critical infrastructure (the Feb-2024 Change Healthcare incident affected Humana among other payers) and regulatory risk over the use of AI/ML in pricing and clinical decisions.
• Pricing and minimum-benefit regulation. Legislative or regulatory changes can impose minimum benefit ratios, restrict premium growth, or increase non-deductible regulatory fees.

Each thinker's analytical framework applied to our data.

• Buffett / Graham Quality + margin of safety

  Fails the quality gate: narrow moat, eroding.

• Peter Lynch Growth at a reasonable price (GARP)

  A fast grower growing 17% at a PEG of 2.3 → expensive for its growth.

• Joel Greenblatt Cheap and high-return (Magic Formula)

  Earnings yield 6% (EBIT/EV) + ROIC 20% → brushes the Magic Formula.

• Howard Marks Perception vs reality + cycle

  The price discounts -4% vs our 17%: perception is more pessimistic than reality, with an identified source of the discount.

• Seth Klarman Capital protection (bear scenario)

  Bear-scenario floor -12%/yr over 5y (material loss) → risk of permanent capital loss.

• Pat Dorsey Moat strength (Five Rules)

  A narrow moat, eroding; sources: efficient scale, switching costs, intangibles → fails the Five Rules.

• Aswath Damodaran Expectations implied by the price

  Justifying the price requires discounting -4%, within what we project (17%) — the story squares with the numbers.