Intrinsic value of HMS Holdings - HMSY

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$20.29

  Intrinsic Value

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  Rating & Target

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  Value-price divergence*

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Previous close

$20.29

 
Intrinsic value

$12.71

 
Up/down potential

-37%

 
Rating

sell

 
Value-price divergence* premium content

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*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of HMSY stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 1.7

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  4.64
  2.00
  2.30
  2.57
  2.81
  3.03
  3.23
  3.41
  3.57
  3.71
  3.84
  3.95
  4.06
  4.15
  4.24
  4.31
  4.38
  4.44
  4.50
  4.55
  4.59
  4.64
  4.67
  4.70
  4.73
  4.76
  4.78
  4.81
  4.83
  4.84
  4.86
Revenue, $m
  496
  506
  518
  531
  546
  562
  580
  600
  622
  645
  669
  696
  724
  754
  786
  820
  856
  894
  934
  977
  1,022
  1,069
  1,119
  1,172
  1,227
  1,286
  1,347
  1,412
  1,480
  1,552
  1,627
Variable operating expenses, $m
 
  252
  257
  263
  269
  276
  284
  292
  301
  311
  321
  295
  307
  319
  333
  347
  362
  379
  396
  414
  433
  453
  474
  496
  520
  544
  570
  598
  627
  657
  689
Fixed operating expenses, $m
 
  200
  205
  210
  215
  221
  226
  232
  238
  244
  250
  256
  262
  269
  276
  282
  289
  297
  304
  312
  320
  328
  336
  344
  353
  362
  371
  380
  389
  399
  409
Total operating expenses, $m
  438
  452
  462
  473
  484
  497
  510
  524
  539
  555
  571
  551
  569
  588
  609
  629
  651
  676
  700
  726
  753
  781
  810
  840
  873
  906
  941
  978
  1,016
  1,056
  1,098
Operating income, $m
  58
  54
  56
  58
  61
  66
  71
  76
  83
  90
  98
  145
  155
  166
  178
  190
  204
  219
  235
  252
  270
  289
  310
  332
  355
  380
  406
  434
  464
  496
  529
EBITDA, $m
  103
  101
  103
  106
  110
  114
  119
  125
  132
  140
  149
  158
  169
  180
  192
  206
  220
  235
  252
  270
  289
  309
  330
  353
  378
  404
  431
  460
  491
  524
  559
Interest expense (income), $m
  6
  7
  7
  7
  8
  8
  8
  9
  9
  10
  10
  11
  12
  12
  13
  14
  14
  15
  16
  17
  18
  19
  20
  21
  22
  24
  25
  26
  28
  30
  31
Earnings before tax, $m
  49
  47
  48
  51
  54
  58
  62
  67
  74
  80
  88
  135
  144
  154
  165
  177
  190
  204
  219
  235
  252
  270
  289
  310
  332
  356
  381
  408
  436
  466
  498
Tax expense, $m
  11
  13
  13
  14
  15
  16
  17
  18
  20
  22
  24
  36
  39
  42
  45
  48
  51
  55
  59
  63
  68
  73
  78
  84
  90
  96
  103
  110
  118
  126
  134
Net income, $m
  38
  34
  35
  37
  39
  42
  45
  49
  54
  59
  64
  98
  105
  112
  120
  129
  139
  149
  160
  171
  184
  197
  211
  226
  243
  260
  278
  298
  318
  340
  364

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  176
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  883
  721
  737
  756
  777
  801
  827
  855
  886
  918
  954
  991
  1,032
  1,074
  1,120
  1,168
  1,219
  1,274
  1,331
  1,392
  1,455
  1,523
  1,594
  1,669
  1,748
  1,831
  1,919
  2,011
  2,108
  2,210
  2,318
Adjusted assets (=assets-cash), $m
  707
  721
  737
  756
  777
  801
  827
  855
  886
  918
  954
  991
  1,032
  1,074
  1,120
  1,168
  1,219
  1,274
  1,331
  1,392
  1,455
  1,523
  1,594
  1,669
  1,748
  1,831
  1,919
  2,011
  2,108
  2,210
  2,318
Revenue / Adjusted assets
  0.702
  0.702
  0.703
  0.702
  0.703
  0.702
  0.701
  0.702
  0.702
  0.703
  0.701
  0.702
  0.702
  0.702
  0.702
  0.702
  0.702
  0.702
  0.702
  0.702
  0.702
  0.702
  0.702
  0.702
  0.702
  0.702
  0.702
  0.702
  0.702
  0.702
  0.702
Average production assets, $m
  95
  97
  99
  101
  104
  107
  111
  115
  119
  123
  128
  133
  138
  144
  150
  157
  164
  171
  178
  187
  195
  204
  214
  224
  234
  246
  257
  270
  283
  296
  311
Working capital, $m
  278
  104
  107
  109
  112
  116
  120
  124
  128
  133
  138
  143
  149
  155
  162
  169
  176
  184
  192
  201
  210
  220
  231
  241
  253
  265
  277
  291
  305
  320
  335
Total debt, $m
  198
  204
  212
  221
  230
  241
  253
  266
  280
  295
  312
  329
  348
  367
  388
  411
  434
  459
  486
  513
  543
  574
  607
  641
  678
  716
  757
  799
  844
  891
  940
Total liabilities, $m
  326
  332
  340
  349
  358
  369
  381
  394
  408
  423
  440
  457
  476
  495
  516
  539
  562
  587
  614
  641
  671
  702
  735
  769
  806
  844
  885
  927
  972
  1,019
  1,068
Total equity, $m
  557
  388
  397
  408
  419
  432
  446
  461
  477
  495
  514
  534
  556
  579
  604
  630
  657
  687
  717
  750
  784
  821
  859
  900
  942
  987
  1,034
  1,084
  1,136
  1,191
  1,249
Total liabilities and equity, $m
  883
  720
  737
  757
  777
  801
  827
  855
  885
  918
  954
  991
  1,032
  1,074
  1,120
  1,169
  1,219
  1,274
  1,331
  1,391
  1,455
  1,523
  1,594
  1,669
  1,748
  1,831
  1,919
  2,011
  2,108
  2,210
  2,317
Debt-to-equity ratio
  0.355
  0.530
  0.530
  0.540
  0.550
  0.560
  0.570
  0.580
  0.590
  0.600
  0.610
  0.620
  0.630
  0.630
  0.640
  0.650
  0.660
  0.670
  0.680
  0.680
  0.690
  0.700
  0.710
  0.710
  0.720
  0.730
  0.730
  0.740
  0.740
  0.750
  0.750
Adjusted equity ratio
  0.539
  0.539
  0.539
  0.539
  0.539
  0.539
  0.539
  0.539
  0.539
  0.539
  0.539
  0.539
  0.539
  0.539
  0.539
  0.539
  0.539
  0.539
  0.539
  0.539
  0.539
  0.539
  0.539
  0.539
  0.539
  0.539
  0.539
  0.539
  0.539
  0.539
  0.539

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  38
  34
  35
  37
  39
  42
  45
  49
  54
  59
  64
  98
  105
  112
  120
  129
  139
  149
  160
  171
  184
  197
  211
  226
  243
  260
  278
  298
  318
  340
  364
Depreciation, amort., depletion, $m
  45
  47
  48
  48
  48
  48
  49
  49
  50
  50
  50
  13
  13
  14
  15
  15
  16
  17
  17
  18
  19
  20
  21
  22
  23
  24
  25
  26
  27
  29
  30
Funds from operations, $m
  88
  82
  83
  85
  87
  90
  94
  98
  103
  109
  115
  111
  118
  126
  135
  144
  154
  165
  177
  189
  203
  217
  232
  248
  265
  284
  303
  324
  346
  369
  394
Change in working capital, $m
  -1
  2
  2
  3
  3
  3
  4
  4
  4
  5
  5
  5
  6
  6
  7
  7
  7
  8
  8
  9
  9
  10
  10
  11
  11
  12
  13
  13
  14
  15
  16
Cash from operations, $m
  89
  23
  81
  82
  84
  87
  90
  94
  99
  104
  110
  106
  113
  120
  128
  137
  147
  157
  169
  181
  193
  207
  222
  237
  254
  272
  291
  311
  332
  354
  378
Maintenance CAPEX, $m
  0
  -9
  -9
  -10
  -10
  -10
  -10
  -11
  -11
  -12
  -12
  -12
  -13
  -13
  -14
  -15
  -15
  -16
  -17
  -17
  -18
  -19
  -20
  -21
  -22
  -23
  -24
  -25
  -26
  -27
  -29
New CAPEX, $m
  -21
  -2
  -2
  -3
  -3
  -3
  -3
  -4
  -4
  -4
  -5
  -5
  -5
  -6
  -6
  -6
  -7
  -7
  -8
  -8
  -9
  -9
  -10
  -10
  -11
  -11
  -12
  -12
  -13
  -14
  -14
Cash from investing activities, $m
  -39
  -11
  -11
  -13
  -13
  -13
  -13
  -15
  -15
  -16
  -17
  -17
  -18
  -19
  -20
  -21
  -22
  -23
  -25
  -25
  -27
  -28
  -30
  -31
  -33
  -34
  -36
  -37
  -39
  -41
  -43
Free cash flow, $m
  50
  12
  69
  70
  72
  74
  76
  80
  84
  88
  93
  88
  94
  101
  108
  116
  125
  134
  144
  155
  167
  179
  192
  207
  222
  238
  255
  273
  293
  313
  335
Issuance/(repayment) of debt, $m
  0
  6
  8
  9
  10
  11
  12
  13
  14
  15
  16
  17
  19
  20
  21
  22
  24
  25
  26
  28
  29
  31
  33
  35
  36
  38
  40
  43
  45
  47
  50
Issuance/(repurchase) of shares, $m
  -18
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  -19
  6
  8
  9
  10
  11
  12
  13
  14
  15
  16
  17
  19
  20
  21
  22
  24
  25
  26
  28
  29
  31
  33
  35
  36
  38
  40
  43
  45
  47
  50
Total cash flow (excl. dividends), $m
  30
  18
  77
  79
  81
  85
  88
  93
  98
  103
  109
  106
  113
  121
  129
  139
  149
  159
  171
  183
  196
  210
  225
  241
  258
  276
  295
  316
  337
  360
  384
Retained Cash Flow (-), $m
  -32
  -7
  -9
  -10
  -11
  -13
  -14
  -15
  -16
  -18
  -19
  -20
  -22
  -23
  -25
  -26
  -28
  -29
  -31
  -33
  -34
  -36
  -38
  -40
  -43
  -45
  -47
  -50
  -52
  -55
  -58
Prev. year cash balance distribution, $m
 
  176
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  187
  68
  68
  70
  72
  74
  78
  81
  85
  90
  85
  91
  98
  105
  113
  121
  130
  140
  150
  162
  174
  187
  201
  216
  231
  248
  266
  285
  305
  327
Discount rate, %
 
  4.30
  4.52
  4.74
  4.98
  5.23
  5.49
  5.76
  6.05
  6.35
  6.67
  7.00
  7.35
  7.72
  8.11
  8.51
  8.94
  9.39
  9.86
  10.35
  10.87
  11.41
  11.98
  12.58
  13.21
  13.87
  14.56
  15.29
  16.05
  16.86
  17.70
PV of cash for distribution, $m
 
  179
  62
  60
  58
  56
  54
  52
  51
  49
  47
  40
  39
  37
  35
  33
  31
  28
  26
  23
  21
  18
  16
  13
  11
  9
  7
  6
  4
  3
  2
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

HMS Holdings Corp., through its subsidiaries, operates in the healthcare insurance benefit cost containment market in the United States. It provides coordination of benefits services to government and private healthcare payers and sponsors to coordinate benefits for claims; payment integrity services that ensure healthcare claims billed are accurate and appropriate; and eligibility verification services, which ensure that individuals meet qualifying criteria for enrollment in a healthcare program. The company’s services also enable customers to recover improper payments; prevent future improper payments; reduce fraud, waste, and abuse; and ensure regulatory compliance. It serves state Medicaid agencies, government health agencies, and health plans, including Medicaid managed care, Medicare Advantage, and group and individual health lines of business; government and private employers; and other healthcare payers and sponsors, including child support agencies. HMS Holdings Corp. was founded in 1974 and is headquartered in Irving, Texas.

FINANCIAL RATIOS  of  HMS Holdings (HMSY)

Valuation Ratios
P/E Ratio 44.6
Price to Sales 3.4
Price to Book 3
Price to Tangible Book
Price to Cash Flow 19
Price to Free Cash Flow 24.9
Growth Rates
Sales Growth Rate 4.6%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 75%
Cap. Spend. - 3 Yr. Gr. Rate -4.2%
Financial Strength
Quick Ratio NaN
Current Ratio 0
LT Debt to Equity 35.5%
Total Debt to Equity 35.5%
Interest Coverage 9
Management Effectiveness
Return On Assets 4.9%
Ret/ On Assets - 3 Yr. Avg. 3.3%
Return On Total Capital 5.1%
Ret/ On T. Cap. - 3 Yr. Avg. 3.5%
Return On Equity 7%
Return On Equity - 3 Yr. Avg. 4.8%
Asset Turnover 0.6
Profitability Ratios
Gross Margin 30.8%
Gross Margin - 3 Yr. Avg. 28%
EBITDA Margin 20.2%
EBITDA Margin - 3 Yr. Avg. 19.8%
Operating Margin 11.7%
Oper. Margin - 3 Yr. Avg. 9.8%
Pre-Tax Margin 9.9%
Pre-Tax Margin - 3 Yr. Avg. 8.1%
Net Profit Margin 7.7%
Net Profit Margin - 3 Yr. Avg. 5.4%
Effective Tax Rate 22.4%
Eff/ Tax Rate - 3 Yr. Avg. 35.4%
Payout Ratio 0%

HMSY stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the HMSY stock intrinsic value calculation we used $496 million for the last fiscal year's total revenue generated by HMS Holdings. The default revenue input number comes from 2016 income statement of HMS Holdings. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our HMSY stock valuation model: a) initial revenue growth rate of 2% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 4.3%, whose default value for HMSY is calculated based on our internal credit rating of HMS Holdings, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of HMS Holdings.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of HMSY stock the variable cost ratio is equal to 50%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $195 million in the base year in the intrinsic value calculation for HMSY stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 3.5% for HMS Holdings.

Corporate tax rate of 27% is the nominal tax rate for HMS Holdings. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the HMSY stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for HMSY are equal to 19.1%.

Life of production assets of 10.3 years is the average useful life of capital assets used in HMS Holdings operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for HMSY is equal to 20.6%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $557 million for HMS Holdings - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 84.604 million for HMS Holdings is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of HMS Holdings at the current share price and the inputted number of shares is $1.7 billion.


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