Aiding Health
The significance of reliable health insurance cannot be overstated. Our well-being, peace of mind, and financial security are inextricably linked to the healthcare systems that support us. As such, the demand for innovative, comprehensive, and adaptable health insurance solutions has never been greater.
In this edition of the Smart Investor newsletter, we take a closer look at one of the most prominent U.S. healthcare insurance companies, providing investors with the necessary information to make informed choices in a constantly changing environment.
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Last Week’s Portfolio Movers
❖ Super Micro Computer (SMCI): Shares surged almost 20% on Monday after the S&P Global said that the stock was selected to join the S&P 500 index on March 18th.
❖ General Electric (GE): The stock jumped after the company’s Board announced its approval of the previously announced spin-off of GE Vernova. On April 2nd, General Electric will become GE Aerospace, a pure-play aviation and defense company, trading on NYSE under the same ticker, while Vernova, GE’s spun-off energy business, will trade under a new ticker, “GEV.” GE shareholders will continue to hold their shares of GE. In addition, they will be entitled to receive one share of GE Vernova for every four shares of GE held on the record date (March 19). According to analysts, GE Aerospace’s market cap is estimated at ~90% of GE’s total market value.
❖ Electronic Arts (EA): Shares fell after the videogame maker announced that it would lay off 5% of its workforce and terminate the development of some new titles, including a high-profile Star Wars franchise. While these moves are in line with a broad trend of downsizing across the industry, investors were spooked by the title cancellations. However, analysts are sticking with their “Buy” ratings on EA, penciling in an average upside of ~8.5% for the stock in the next 12 months.
Portfolio Earnings and Dividend Calendar
❖ The Q4 2023 earnings season for Smart Investor Portfolio companies has almost ended, but companies whose fiscal year differs from the calendar year continue to report their results. Thus, on March 7th, Broadcom Inc. (AVGO) is scheduled to report its fiscal Q1 2024 while Oracle (ORCL) will update on its fiscal Q3 2024 results.
❖ The ex-dividend dates for ITT, Inc. (ITT) and UnitedHealth (UNH) are March 7th and 8th, respectively.
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Weekly Portfolio Trades
Today, we are exchanging UnitedHealth, which ran into trouble, with another formidable player in the healthcare market, Elevance Health.
New Buy: Elevance Health (ELV)
Elevance Health, Inc., previously known as Anthem, is the largest commercial insurance company in the United States. ELV offers a wide range of health insurance products and services, such as medical, pharmaceutical, dental, behavioral health, long-term care, and disability plans.
The company traces its roots to two medical insurance companies founded in 1944 in Indianapolis, Indiana, which merged in 1985 to establish Anthem Inc. The company grew and expanded its offerings and geographical presence through the years, mainly through strategic acquisitions. Today, Elevance Health is ranked #22 in the Fortune 500 list, wielding a market capitalization of $116 billion and annual revenues of over $171 billion. The company’s shares have been traded on the NYSE since 2001.
Diversified Services
Elevance Health, Inc. offers a comprehensive suite of commercial, Medicare, and Medicaid plans through its affiliates and subsidiaries, such as Amerigroup, DeCare Dental, HealthLink, and others. The health insurance giant serves 117 million people across the nation.
The company operates through two main segments: Health Benefits and Carelon. The Health Benefits segment, responsible for over 85% of total revenue, comprises Individual, Employer Group risk-based, Employer Group fee-based, BlueCard, Medicare, Medicaid, and Federal Health Products & Services businesses. The healthcare services segment Carelon is comprised of CarelonRx and Carelon Services.
ELV’s revenue streams are diversified across multiple markets and service lines, which allows the company to mitigate risks, helping it achieve stable revenue growth. Its revenues primarily stem from premiums on its health insurance products and fees earned from its pharmacy benefits management (PBM) business within the Carelon segment.
ELV is the largest for-profit managed healthcare company in the Blue Cross Blue Shield Association, maintaining a dominant market position in the 14 states served by the BCBSA. The company’s membership is diverse by geography and by product type, consisting primarily of employer groups but also including meaningful Medicaid membership. The company also has a notable and growing presence in the Medicare Advantage market.
Comprehensive Business Model
Beyond its large size and reach, ELV’s competitive advantages also stem from its comprehensive business model, encompassing services across various domains of healthcare. The integrated business model permits significant cost advantages, for instance through in-house cooperation between the health insurance plans and the PBM.
Another factor shaping up to become one of the company’s competitive advantages is its growing implementation of cutting-edge technology such as Artificial Intelligence (AI). In recent years, ELV has strongly focused on consumer digital health, offering easy access through its proprietary health app. The company currently sees opportunities to leverage generative AI and other technologies to provide better-quality health service, while cutting costs and increasing productivity.
Strong Fundamentals, Robust Delivery
ELV boasts excellent financial health with zero net debt (i.e. it has more cash than its total debt) and an enviable cash position. Its robust balance sheet displays resilience against financial volatility, reflecting prudent management of capital. The company’s debt is highly rated by major credit rating agencies: “A-“ at Fitch and “A” at S&P Global Ratings.
Elevance Health also displays robust capital efficiency metrics, with the returns on assets, equity, and invested capital far surpassing the averages for its industry. As for its profitability, ELV boasts industry-beating gross, operating, and net profit margins.
Over the past five years, ELV’s operating revenue has increased at a CAGR of 13%, while its adjusted earnings-per-share increased at a CAGR of 16%.
The company released its latest financial results on January 24, reporting for Q4 and full-year 2023. The company reported quarterly EPS above analysts’ expectations, which has been the case for all quarters in which these estimates were available.
For fiscal year 2023, Elevance reported a 9% increase in operating revenue, driven by higher premium revenue in the Health Benefits segment and growth in pharmacy product revenue in CarelonRx. Adjusted full-year EPS came in at $33.14, surpassing both analysts’ estimates and the company’s outlook. Following these results, management lifted its outlook for full-year 2024 adjusted EPS to at least $37.10.
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Total Return Outlook
Elevance Health’s shares rose by almost 50% in the past three years, about five times more than the growth of iShares US Healthcare Providers ETF (IHF), where ELV is the second-largest holding. Over the past 12 months, ELV stock has gained just over 5%, still strongly outperforming IHF.
The stock’s valuation remains more than reasonable, trading at a ~40% discount to the Healthcare sector’s average. ELV’s valuation sits at the mid-range for its peers in the industry, despite registering above-average earnings growth compared to its peers. In addition, based on projected cash flows, the stock is trading ~60% lower than its fair value, placing it firmly in the value stock category.
TipRanks-scored Top Analysts see an average upside of 17.3% for the stock over the next 12 months. ELV carries a TipRanks Smart Score rating of 8/10 (“Outperform”) with a “Strong Buy” recommendation:
Elevance Health’s shareholders are compensated not only through stock price appreciation: the company pays notable and growing dividends. ELV’s dividend yield currently stands at 1.2% and, given the company’s balance sheet strength and robust financial performance, it is expected to continue increasing for years to come. Thus, following strong 2023 results, the management announced a 10% raise in its quarterly dividend.
In addition, Elevance performs share repurchases on an opportunistic basis. In 2023, the company performed buybacks for $2.7 billion. After these buybacks, the company retains a $4.2 billion capacity of Board-approved share repurchase authorization.
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Conclusion
Elevance Health, Inc. is a stable, reliable, financially robust healthcare provider. The company’s strong financial performance and moderate valuation make it appealing to investors, while its alignment with shareholder interests makes it an attractive long-term investment opportunity. As such, we believe it can be a valuable addition to the Smart Investor portfolio.
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New Sell: UnitedHealth (UNH)
UnitedHealth Group, Inc. is a diversified multinational managed healthcare and insurance company, offering healthcare coverage and benefits services. It is the world’s seventh-largest company by revenue and the largest healthcare company by revenue.
UNH’s financial health is excellent, while its earnings growth so far has never disappointed. However, some recent developments have weighed heavily on its stock performance.
At first, the stock tumbled following a wide-scale cyberattack on Change Healthcare, a division of UnitedHealth that processes insurance claims and pharmacy requests for more than 340,000 physicians and 60,000 pharmacies. The cyberattack, which began on February 21st, disrupted operations in pharmacies, hospitals, and health systems across the country. It was not a one-time event: the attacks have continued for over a week, and the system disruptions remain unresolved. The issue now seems to be on a much larger scale than was initially thought, with no current outlook as to how and when it will be solved. Moody’s Investors Service said the cyberattacks are “credit negative” for UNH, warning they could have “financial and reputational impacts.”
If that wasn’t enough, according to several news agencies, UnitedHealth is facing a Department of Justice antitrust inquiry, related to the relationship between the company’s insurance unit and its Optum Health services arm. In recent months, the Biden administration anti-monopoly agency has advanced investigations of some of the biggest U.S. companies in various sectors, calling for stricter enforcement of antitrust laws. The White House has signaled that the Healthcare sector is its top priority, as the administration aims to lower healthcare costs, and announced the creation of a special federal task force to promote this initiative.
We believe that UNH remains a solid long-term investment, given its economic moat and stellar finances. However, at this moment, it is difficult to forecast how these two developments will affect the company and its stock performance in the short to medium term. Therefore, we find it prudent to sell the stock.1
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Portfolio Stocks Under Review
In this section, we will flag stocks that may be let go from the portfolio.
¤ General Electric (GE): We are taking the former conglomerate off the list following the split-up details which seem to be fair for GE’s investors. We believe the break-up with Vernova will be as successful as the early 2023 spin-off of GE HealthCare, which was very beneficial for both companies and their investors.
¤ Electronic Arts (EA): The videogame company remains under review for potential sale with low urgency, as we continue to watch the trends in gaming sales, which depend on the overall economic situation. EA is a financially healthy, well-run company, but its 2024 growth prospects depend on the market rebounding from last year’s weakness.
Charter Members of the 30% Winners Club
*The 30% Winners Club includes stocks from the Smart Investor Portfolio that have risen at least 30% since their purchase dates.
Healthcare stocks were under pressure on the announcement of the Biden administration’s special task force aimed at lowering medical costs. As a result, our exclusive club has lost one of its recent entrants, Molina Healthcare (MOH), which fell below the 30% threshold.
The Winners Club now includes 14 stocks: SMCI, GE, AVGO, ANET, EME, CDW, AMAT, STLA, TSM, JBL, ULTA, ORCL, GD, and PH.
The next in line to enter the Winners’ ranks are now MOH, and ITT with 29.6% and 27.2% respective gains since purchase. Will they close these minor gaps, or will someone else outrun them to the finish line?
What’s Next?
Our next commentary will come out on Wednesday, March 13th, before the market opens.
Until then – we wish you a world of investment success!
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Disclaimer
The information contained in this article represents the views and opinions of the writer only, and not the views or opinions of TipRanks or its affiliates and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy, or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices, or performance.
