We issued an updated research report on Anthem, Inc. ANTM on Mar 30, 2015.
The company delivered impressive results (announced on Jan 28) in the fourth quarter with its earnings outperforming the Zacks Consensus Estimate and improving year over year. The upside was driven by an improved underlying performance and increased membership across the Commercial and Government segments. Anthem is adept in capitalizing on market opportunities and is taking up initiatives to enhance its membership base.
Anthem’s key strength lies in its independent license for marketing products under Blue Cross and Blue Shield Association (“BCBSA”), the most widely recognized brand in the industry that enhances earnings further. Association with the strong Blue Cross and Blue Shield (BCBS) brand name allows the company to succeed in its membership migration strategy, thereby successfully retaining customers. Additionally, the BCBS brand enables the company to provide member services through the BlueCard program. These services will be provided to individuals who are customers of BCBS plans not affiliated with Anthem in their BCBS licensed markets. This contributes to overall membership growth and is a solid source of revenue.
Anthem has also been succeeding in the Administrative Services Only (“ASO”) marketplace. The acquisition of a large ASO state contract in the first quarter of 2014 also led to an increase in self-funded medical membership in the year.
Anthem has been actively strengthening its portfolio through takeovers. In Feb, the company completed the acquisition of Simply Healthcare Holdings to enhance its Government Business division. Additionally, the company’s subsidiary – Anthem Blue Cross and Blue Shield – inked a deal with Aurora Health Care in Wisconsin to improve health care quality by investing in primary care. Moreover, the company remains focused in retaining its decades old client Exlservice Holdings, Inc. – one of the leading business process solutions companies – by renewing its long-standing care-management relationship.
Anthem’s strong capital and cash position enables it to engage in consistent dividends payouts and stock repurchases. The company announced a 43% quarterly dividend hike in Jan 2015 in an attempt to further boost investor sentiment. It also expects to invest $2–$2.5 billion in share buybacks this year.
However, on the downside, the healthcare reform has reduced the selling season for the Medicare Advantage plans. Moreover, establishment of the minimum medical loss ratios is increasing expenditures for healthcare companies. In 2014 Anthem incurred huge general and administrative expenses related to the Health Insurance Provider (HIP) fee that led to deterioration in the SG&A expense ratio.
Anthem’s financial leverage has increased over the past few years. The debt-to-capital ratio has been deteriorating over the years and 2014 was no exception. In fact, the ratio continues to be above the targeted range of 25–35%, as indicated by the bank covenants.
Currently, Anthem holds a Zacks Rank #2 (Buy).
Stocks to Consider
Better-ranked stocks in the medical – health maintenance organization sector include Magellan Health, Inc. MGLN, Aetna Inc. AET and Centene Corp. CNC. While Magellan Health sports a Zacks Rank #1 (Strong Buy), Aetna and Centene hold the same Zacks Rank as Anthem.
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