On Jan 12, 2014, we issued an updated research report on Anthem Inc. (ANTM), earlier known as WellPoint Inc. We believe that the company’s strategic acquisitions and partnerships, efficient capital management and rising membership numbers should help it generate long-term growth. However, the adverse impacts of the Health Care Reform, increased financial leverage and higher medical costs are likely to mar the positives to some extent.
Anthem’s substantial earnings growth over the past few quarters have been spurred by improved operating cost structure, strategic acquisitions, efficient capital management and investments to support improvement in healthcare affordability. Further, Anthem’s key strength lies in its independent license for marketing products under BCBSA, the most recognized brand in the industry that enhances earnings growth further. The company’s acquisitions have been impressive over the past few years which has not only helped it boost its membership base but also aided the company’s geographic expansion. Among its latest endeavors, Anthem entered into an agreement to acquire Simply Healthcare Holdings to enhance its government business division.
Excluding acquisitions, Anthem forms alliances with various companies for business expansion. The company also engages in divestment of its non-core operations to enhance its core operations. Toward this end, Anthem vended its online contact lens subsidiary, 1-800 CONTACTS and the eye glasses business, glasses.com. Anthem’s strong capital and cash position have enabled the payment of cash dividends and pursuit of stock repurchases. The company authorized a $5 billion increase in its share repurchase program in the fourth quarter of 2014. Moreover, Anthem has been succeeding in the Administrative Services Only (“ASO”) marketplace. The acquisition of a large ASO state contract in the first quarter of 2014 has also led to an increase in self-funded medical membership in the first nine months of 2014.
However, on the flip side, adverse impacts of the Health Care Reform like reduction in the selling season for the Medicare Advantage plans and establishment of the minimum medical loss ratios are likely to weigh on the company somewhat. Moreover, the Health Care Reform has imposed a compulsory annual Health Insurance Provider (“HIP”) fee which has led to high general and administrative costs and a deterioration in the SG&A expense ratio for Anthem in the first nine months of 2014.
Moreover, increased financial leverage is a matter of concern for the company. In fact, Anthem’s debt-to-capital ratio continues to be above the targeted range of 25–35%, as indicated by the bank covenants, thus raising concerns about sustainable liquidity in the future. Moreover, higher medical costs in the Senior, Local Group and State-Sponsored businesses, lower favorable prior-year reserve development and the impact of minimum medical loss ratio requirements have been affecting the benefit expense ratio adversely. Additionally, Anthem faces competitive threats from peers who enjoy greater market share, superior financial resources, higher ratings and stronger brand recognition.
Earlier, the company reported third-quarter 2014 earnings that surpassed the Zacks Consensus Estimate and improved year over year on higher memberships across the Commercial and Government segments. Notably, this Zacks Rank #2 (Buy) stock delivered positive earnings surprises in the last four quarters, with an average beat of 5.05%.
Other stocks in the healthcare space that look attractive at current levels include Centene Corp. (CNC), Amedisys Inc. (AMED) and UnitedHealth Group Incorporated (UNH). While Centene sports a Zacks Rank #1 (Strong Buy), Amedisys and UnitedHealth have the same Zacks Rank as Anthem.
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