Exclusive Healthcare Warehouse

Over the past year, healthcare has been a nightmare place to invest. One area of ​​the healthcare space that has withstood the sharp decline, however, is those companies that operate in the sector’s managed plan space.

One of the top performers over the past 12 months is Elevance Health Inc. (NYSE:ELV), formerly known as Anthem Inc.

The company’s shares have gained 13.5% over the past year, compared with a nearly 55% decline in the health care sector. The stock’s performance also compared favorably with the S&P 500’s 17% decline.

This discussion will look at why Elevance is performing so well and whether it currently offers value.

Recent earnings results

First, let’s look at the company’s most recent quarterly results.

Elevance reported third-quarter results on October 19, easily beating what the market expected. Revenue rose 11.5% to $39.6 billion, which was $555 million above estimates. Adjusted earnings per share of $7.53 were a double-digit increase from $6.79 a year earlier and 38 cents better than analysts expected.

Premiums rose nearly 11% to $33.7 billion, while product revenue was 18.5% higher to $3.97 billion. All areas of the company posted revenue gains, led by 13.4% growth in the government business and a 10.7% improvement in IngenioRx. The commercial and specialized segment rose by 6.4%.

Total medical memberships increased 4.9% to 47.3 million, led by 7% growth in government business and a 3.9% improvement in commercial and specialty business, the larger of the two segments. The company’s smaller footprints also showed growth. Vision, Dental Administration and Life & Disability increased their members by 20.7%, 6.1% and 2.2%.

Following the third-quarter results, management raised guidance for the year, with the company’s adjusted earnings per share of at least $28.95 in 2022, up from previous guidance of at least $28.70, $28.40 and $26.75. Reaching this level would represent an 11.4% improvement over 2021.

Inferences from revenue results

Elevance’s growth in the third quarter was driven by two fronts: premium growth and membership growth. The company surpasses all its competitors with more than 47 million members.

This provides the company with several advantages. Chief among them is that Elevance can keep health plan costs lower than its peers and still see an increase in its top line. Premium growth was driven in part by an additional 2.2 million members added to the client pool during the quarter.

Part of that growth was due to Elevance’s acquisition of Paramount Advantage and Integra Managed Care earlier this year. Although the transaction added members to its customer base, the company saw organic growth in its medical membership. This includes an additional 232,000 members, or 9%, added to the company’s Medicaid business. The number of commercial fee-based members was also higher during the year.

It should be noted that Medicaid growth may be a bit overstated at this point because Medicaid redeterminations, which are the requirements the government sets for eligibility for the program, were halted by legislation that was passed during the height of the pandemic Covid-19. When the redistricting goes back into effect, states will have up to a year to determine eligibility for everyone currently enrolled in the program. This could result in up to 15 million people no longer eligible for Medicaid. However, that hasn’t happened yet, and it might not until later in 2023.

On the plus side, more states are now expanding access to Medicaid. For example, voters in South Dakota approved a measure during the last election to expand access to Medicaid for residents of that state. An estimated 45,000 more state residents will be eligible for Medicaid.

Turning to full-year guidance, management again raised its adjusted earnings per share forecast for the year, speaking to their confidence in the business for 2022.

This forecast revision is not surprising given how successful Elevance’s growth has been over the past decade.

Elegance: Exclusive health care warehouse

Revenue growth is very steady, with net income typically also showing year-over-year increases.

Elevance also uses its capital wisely, including acquisitions. Most recently, the company announced an agreement to purchase specialty pharmacy BioPlus, which works with patients with complex and chronic diseases such as cancer, multiple sclerosis and autoimmune diseases. Add-ons like this help expand Elevances business and increase membership.

The use of capital extends beyond simply acquisitions to return of capital to shareholders. The company has a dividend growth streak of 12 consecutive years. The dividend has a compound annual growth rate of over 16% over the past decade. The long-term rate of performance is impressive and shows a commitment to high levels of dividend growth. The company also increased its dividend by 13.3% for the payment date of March 25, 2022, indicating that dividend growth has not slowed much over the past 10 years.

The dividend looks very safe as the projected payout ratio for 2022 is just 18%, just below the 10-year average of 20%. Shares only yield 1%, but that’s mainly a reflection of medium-term share price gains.

Elevance has also been active in buying back its shares. Over the past decade, the number of shares has been shrinking by 1.7% per year. This trend continued in the latest quarter as Elevance repurchased 1.2 million shares at an average price of $476.70 during the period. For the first nine months of the year, the company repurchased 3.7 million shares at an average price of $473.36. With shares trading near $510, Elevance appears to have received good value, at least for now, for its share buyback activity. The company had $2.4 billion, or 2% of its current market capitalization, remaining under its share repurchase authorization at the end of the quarter.

Elevance has a GF score of 89 out of 100, suggesting the stock’s moderate outperform potential. The company scores well in the areas of growth and profitability, has moderate scores for financial strength and momentum, and a low valuation for value.

Elegance: Exclusive health care warehouse

Elegance: Exclusive health care warehouse

Even with the market outperformance that Elevance has had, the stock is not much ahead of its GF value based on its historical ratios, past financial performance and analysts’ future earnings forecasts.

Elegance: Exclusive health care warehouse

Elegance: Exclusive health care warehouse

With a GF value of $482.46, Elevance has a price-to-GF value ratio of 1.06 and is rated fairly valued by GuruFocus.

Final thoughts

Elevance has significantly outperformed its own sector and the broader market and is one of the best performing names in the managed health plan space.

The latest quarter saw double-digit growth in revenue and earnings per share, driven by strength in new members and premiums. Growth was very broad-based, with all segments reported higher in both revenue and membership. Even the company’s smaller areas, such as Vision and Dental, are seeing solid growth rates.

There are some risks, such as a decline in the number of Medicaid-eligible customers, that must be taken into account, but Elevance has a significant lead in total members compared to its peers and is not afraid to use capital to acquire others companies.

The return on capital to shareholders is solid and the dividend is well covered.

The shares are not trading at a discount to fair value, but they cannot be considered very expensive either. With the positives working in the company’s favor, investors looking for a managed healthcare name should consider adding Elevance to their watch list.

This article first appeared on GuruFocus.

Leave a Comment

Your email address will not be published. Required fields are marked *