When it comes to value investing, sometimes boring is good. Anthem Inc (NYSE:ANTM) is a good case study of a company that does not get much attention but is doing well for investors. And last week’s first-quarter results strengthen that view.
Anthem Q1 Earnings
In Q1, Anthem earned $1.312 billion, up 30 percent over last year, on revenue of $22.342 billion, a paltry 0.1 percent increase over the same period. The company forecasts 2018 revenue in the range of $91-$92 billion while earnings will top more than $14.12 a share. The business benefited from a lower-than-expected benefit expense ratio of 81.5 percent. Management owes its success to the integrated clinical and care management programs.
Anthem generated operating cash flow of $2.2 billion, or 1.7 times net income. On its press release, CEO Gail Boudreaux said:
“Throughout 2018, we are prioritizing investments to create a more flexible infrastructure that can quickly respond to the evolving needs of our customers and the changing healthcare environment. We are also driving an increased focus on executional excellence across the organization. I see further opportunity for Anthem as we continue to unlock the full potential of our company to deliver consistently strong financial performance and future growth.”
ANTM popped more than 6% immediately following the report and has since settled to 3% from pre-earnings prices.
ANTM vs the Competition
When the pharmaceutical space is consolidating and excess costs are getting squeezed out, Anthem is the best investment idea in the sector. Conversely, Rite Aid Corporation (NYSE:RAD) is hardly maximizing shareholder value through its Albertsons merger. Walgreens Boots Alliance Inc (NASDAQ:WBA) trades at depressed forward multiples of 10 times, compared to 13.5 times with ANTM stock. Markets have little optimism in the operational risks ahead as drug stores merge or shrink.
But investing in Anthem has a slew of benefits. The company has flexibility to raise premium rates, as it did last quarter, to boost operating revenue. It acquired both Health Sun and America’s 1st Choice to hone in on organic growth. Those steps were taken to offset the membership decline in the Local Group fully-insured and Medicaid businesses and the shrinking Individual ACA-compliant marketplace.
Investing in the Business
Anthem experienced a modest increase in SG&A expenses, with the ratio rising to 15.3 percent, or up 100 basis points. Increased investment spending in 2018 will pay off this year and beyond, while higher efficiencies will lower administrative costs. To take advantage of the underperformance in ANTM stock, where shares are still 14 percent below 52-week highs, Anthem may buy back more shares.
In Q1, it bought 1.7 million shares for $395 million, or $233.51 a share. It has the board approval to buy back $6.8 billion worth of shares.
Outlook for ANTM
Anthem based its strong $14.12 EPS and operating revenue in the range of $91 billion – $92 billion on its expectations for medical membership growth. The company expects around 41 million memberships, nearly 15 million fully-insured memberships, and 23.3 million – 25.4 million in self-funded memberships. Individual memberships fell the most (down 60 percent) last quarter but it is a small percentage of the total.
Valuation and Takeaway
On average, analysts have a $279.61 price target on the stock, which is well above the $230.50 recent price. If investors used a P/E Multiples Valuation model, which compares Anthem’s stock price to its peers, then shares could be worth around $300. The companies comparable to Anthem are Humana Inc (NYSE:HUM), Aetna Inc (NYSE:AET), Centene Corporation (NYSE:CNC) and UnitedHealth Group Inc (NYSE:UNH).
People always need a healthcare plan that addresses their medical needs.
And right now, for investors, Anthem is the most attractive of the bunch at its modest 22x P/E and manageable debt/equity of 0.75 times. Earnings will grow in the 10 percent range and in the mid-teens over the next five years. Prudent management, cost cuts, and higher efficiencies all lead to the potential for strong shareholder returns in the years ahead.
Disclosure: Author does not own shares in any of the companies mentioned.
