We can also see is that the company has $482 million in operating earnings (ttm). Adjusted operating earnings are $610 million (ttm). We make adjustments to operating earnings by constructing an operating earnings figure from the top of the income statement down, where EBIT and EBITDA are constructed from the bottom up.
Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–income that a company does not expect to recur in future years–ensures that these earnings are related only to operations.
With an Enterprise Value of $2.96 billion and adjusted operating earnings of $610 million (ttm), that leaves WellCare with an Acquirer’s Multiple of 6.64 or, 6.64 times adjusted operating earnings.
That means WellCare still represents good value.
Strong Free Cashflow
As mentioned above, the reason WellCare Health Plans, Inc. (NYSE:WCG) is able to consider ongoing acquisitions is its strong free cashflows.
A quick look at the company’s quarterly statement of cashflows below for the trailing months shows WellCare had $1.77 billion in operating cashflow for the trailing twelve months and capex of $104 million. That leaves WellCare with $1.67 billion in free cash flow and a FCF/EV yield of 56%.
| Quarterly Cashflow Statement (Amounts in 000’s) | ||||
| Quarter: | 3rd | 2nd | 1st | 4th |
| Quarter Ending: | 9/30/2016 | 6/30/2016 | 3/31/2016 | 12/31/2015 |
| Net Income | $68,600 | $91,500 | $37,100 | $13,000 |
| Net Cash Flow-Operating | $1,140,500 | $51,900 | -$112,100 | $474,700 |
| Capital Expenditures | -$23,900 | -$20,800 | -$16,800 | -$42,400 |
| Sale and Purchase of Stock | -$1,300 | -$100 | -$5,500 | $300 |
| Net Borrowings | -$100,000 | $0 | -$103,100 | -$100 |
(Source: Company reports, sec.gov)
It’s important to note that in Q3 2016 operating cash flow was inflated by the advance receipt of October CMS Medicare premium and subsidy payments of $683 million in September. If we adjust the operating cashflow by subtracting the advanced receipts of $683 million that leaves $457 million in operating cash flow for Q3 2016, free cash flow of $990 million (ttm), and a FCF/EV yield of 33%.
Summary
WellCare is a well run company with a growth through acquisition strategy and a strong existing pipeline. The company has growing revenues, a strong balance sheet and loads of free cash flow.
If WellCare continues to make smart acquisitions and develop its organic opportunities in Medicaid and Medicare this is a company that will continue to grow strongly. Something else to consider is the number of provided-owned opportunities that are also starting to pop-up on the radar of WellCare.
In terms of its valuation, the company remains undervalued on both an Acquirers Multiple of 6.64 and a free cashflow yield of 33%.
Note: This article is originally published at The Acquirer’s Multiple.
