But based on estimated annual sales of $71.0 billion with cash earnings of $2.6 billion and using a cash earnings times a capitalization multiple valuation, reasonable business value looked to be around $86 to $103 a share at a fairly conservative industry multiple ranging from 10 to 12, a margin of safety too good to ignore. After better news, the shares rose to a recent price around $78.
At about that time, fellow insurer Humana Inc (NYSE:HUM) also reported a lower-than-expected quarterly profit and cut its forecast, admitting it had been surprised by increased costs. The company reported second quarter earnings of $356 million, down from $460 million the year before, though again, revenue rose 4% to $9.7 billion. Humana Inc (NYSE:HUM) shares fell to $62 in extended trading after the release.
Its fair business value looked to be around $84 to $100 a share using the 10 to 12 multiple range, with estimated revenues of $41.2 billion and cash earnings of $1.3 billion. Humana Inc (NYSE:HUM) also quickly improved results. Its shares are now near $82.
The retail space often offers similar opportunities. In October 2012, Deckers Outdoor Corp (NASDAQ:DECK) reported third-quarter sales below analyst estimates as higher pricing put off customers. The company cut its full-year revenue growth forecast to 5% from 14% and said it would have a 33% drop in per-share earnings. The bad news sent Deckers Outdoor Corp (NASDAQ:DECK) shares down to $29 after the bell.
Although the release was an unequivocal disappointment, based on annual sales of around $1.5 billion and a deeply discounted earnings estimate of $138 million, the company’s reasonable business value was around $55 a share at an average retail industry multiple of 14. At a significant discount, with no debt and plenty of time to stabilize, it’s not surprising to see the company rebound to trade at around $54.
There’s plenty of evidence that the stock market is not a level playing field. But this doesn’t mean an individual investor can’t do well. Knowing the right things and waiting for them to play out might not be the lock that some market players have, but it can still provide an adequate return on investment.
The article A Rigged Market? It’s OK With Me originally appeared on Fool.com and is written by Bob Chandler.
Bob Chandler has a long position in WellPoint. The Motley Fool recommends WellPoint. The Motley Fool owns shares of WellPoint. Bob is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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