A month has gone by since the last earnings report for Anthem (ANTM). Shares have added about 13.2% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Anthem due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Anthem’s Q3 Earnings Beat Estimates, Improve Y/Y
Anthem delivered third-quarter 2019 earnings of $4.87 per share, marginally beating the Zacks Consensus Estimate by 0.6%. Additionally, the bottom line improved 27.8% year over year on the back of higher revenues.
Further, Anthem reported operating revenues of $26.4 billion, beating the Zacks Consensus Estimate by 4.1%. Moreover, the top line was up 15.1% year over year, aided by membership growth across businesses, growth in value-added services and the premium rate increases to cover the overall cost trends. However, this upside was partially offset by the year-long waiver of the health insurance tax in 2019.
Quarterly Operational Update
Medical enrollment inched up 2.7% year over year to 41 million members, backed by growth in Medicaid and Medicare, partly offset by the declines in Commercial & Specialty Business enrollment. Anthem’s benefit expense ratio of 87.2% expanded 240 basis points (bps) from the prior-year quarter. This increase was attributable to one-year waiver of the health insurance tax in 2019. SG&A expense ratio of 12.9% contracted 250 bps from the year-ago quarter owing to the year-long waiver of the health insurance tax in 2019 plus growth in the operating revenues.
Strong Segmental Results
Commercial & Specialty Business
Operating revenues were $9.2 billion in the second quarter, up 3.9% year over year. Operating gain totaled $930 million, up 11.5% million year over year. This increase is driven by more penetration of value-added services, such as pharmacy and integrated health offerings. However, the same was partly offset by unfavorable reserve development. Operating margin was 10%, up 70 basis points (bps) year over year.
Operating revenues were $16 billion, up 14.1% from the prior-year quarter.
Operating gain was $616 million, up 35.1% year over year, driven by better medical cost performance in Medicaid. However, the same was offset by one-year waiver of the health insurance tax to some extent. Operating margin was 3.9%, up 60 bps year over year.
The Other segment’s operating loss of $18 million is narrower than the year-earlier quarterly loss of $41 million.
As of Sep 30, 2019, Anthem’s cash and cash equivalents summed $4.2 billion, up 6.5% from 2018 end. As of Sep 30, 2019, its long-term debt less current portion increased 9.3% to $18.8 billion from the level at 2018 end.
Operating cash flow at the end of the first nine months of 2019 was $4.7 billion, up 40.7% year over year.
During the third quarter, Anthem bought back shares worth $644 million. As of Sep 30, 2019, the company had shares worth around $4.1 billion remaining under its share buyback authorization. Moreover, the company paid out a quarterly dividend of 80 cents per share, adding up to a cash distribution worth $204 million. The company announced a fourth-quarter dividend of 80 cents per share on Oct 22, 2019, payable Dec 20 to shareholders of record on Dec 5, 2019.
Revised Guidance for 2019
Based on solid third-quarter results, Anthem has updated its outlook for 2019. The company’s adjusted net income is now expected to be higher than $19.40 per share, up from the prior projection of $19.30. Medical membership is still estimated to be around 41 million. Operating revenues are predicted to be around $103 billion, up from the earlier estimate of $102 billion. This includes premium revenues of $94-$95 billion.
Operating cash flow is now anticipated to be higher than $5.5 billion.
SG&A ratio is forecast in the band of 13-13.3%, lower than the earlier outlook of 13.2-13.5%. The company estimates the benefit expense ratio to be 86.5-86.8%, up from the range of 86.2-86.5%.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in estimates review.
At this time, Anthem has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. Following the exact same course, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Anthem has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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