Anthem's (ANTM) Q3 Earnings Beat Estimates, Improve Y/Y

Anthem Inc.’s ANTM third-quarter 2017 adjusted net income per share of $2.65 surpassed the Zacks Consensus Estimate of $2.41 by 10%. The bottom line also jumped 8.2% year over year.

Operating revenues of $22.1 billion missed the Zacks Consensus Estimate by 0.1%. The top line, however, grew 4.6% year over year due to premium rate increases as well as higher enrollment in the Medicaid, Medicare, and Local Group insured and self-funded businesses.

Operational Update

Medical enrollment increased 0.9% year over year to 40.3 million members. The rise was primarily recorded by commercial & specialty business as well as fully insured and self-funded Local Group businesses. Medicare and Medicaid enrollment also contributed to the appreciation. This upside was partially offset by a decline in membership in the National Account and Individual businesses.

Total expenses increased nearly 5.1% to $21.3 billion in the reported quarter, mainly due to a 7% rise in benefitexpenses and 3% increase in selling expenses, both on a year-over-year basis.

Anthem’s benefit expense ratio of 87% deteriorated 150 basis points (bps) from the prior-year quarter. This was largely due to the one-year waiver of the health insurance tax in 2017. However, the impact of a retroactive revenue adjustment in the Medicaid business and improved medical cost performance in the Individual and Large Group businesses were offsets.

The Selling, General & Administrative (SG&A) expense ratio of 13.6% increased 120 bps from the year-ago quarter. This was due to one-year waiver of the health insurance tax in 2017 and the impact of fixed cost leverage on operating revenue growth. However, the rise was partially offset by increased spend to support growth initiatives during the quarter.

Segment Update

Commercial & Specialty Business

Operating revenues were $10 billion in the third quarter, up 4.1% year over year.

Operating gain totaled $534.6 million, down 16.2% year over year due to increased spend to support growth initiatives during the quarter and the impact of the one-year waiver of the health insurance tax in 2017. The decrease was partially offset by improved medical cost performance in the Local Group and Individual businesses.

Operating margin was 5.3%, down 130 bps year over year.

Government Business

Operating revenues were $12 billion in the third quarter, up 5% from the prior-year quarter.

Operating gain was $457.5 million, down 4.5% year over year. The downside reflected increased spend to support growth initiatives during the quarter and the impact of the one-year waiver of the health insurance tax in 2017. However, the deterioration was partially offset by the timing impact of a retroactive revenue adjustment in the Medicaid business.

Operating margin was 3.8%, declining 40 bps year over year.

Other 

Operating revenues were $7.3 million in the third quarter, up 21.7% from the prior-year quarter.

The segment reported an operating loss of $10.1 million, narrower than an operating loss of $38.5 million in the prior-year quarter. The improvement was primarily driven by lower expenses related to the terminated Cigna acquisition.

Operating margin was 4.4%, down 70 bps year over year.

Anthem, Inc. Price, Consensus and EPS Surprise

Anthem, Inc. Price, Consensus and EPS Surprise | Anthem, Inc. Quote

Financial Update

As of Sep 30, 2017, Anthem had cash and cash equivalents of $6.1 billion, up 49.6% from year-end 2016.

As of Sep 30, 2017, its long-term debt declined 4% to $13.8 billion from year-end 2016.

As of Sep 30, 2017, shareholder equity was $25.9 billion, up 3.3% from year-end 2016.

Operating cash flow was $5.5 billion for the first nine months of 2017, reflecting year-over-year growth of 83%.

Share Repurchase and Dividend Update

During the quarter, Anthem repurchased 5.9 million shares of its common stock for $1.1 billion.

During the first nine months of 2017, it repurchased 8.8 million shares of its common stock for $1.6 billion.

As of Sep 30, 2017, it had approximately $2.5 billion of share repurchase authorization remaining.

During the third quarter, Anthem paid a quarterly dividend of 70 cents per share, representing a distribution of cash totaling $181.4 million.

On Oct 24, 2017, the Audit Committee declared third-quarter dividend of 70 cents per share, payable on Dec 21, 2017 to shareholders of record at the close of business on Dec 5, 2017.

Guidance for 2017

Anthem expects adjusted net income in the range of $11.90 to $12.00 per share while in the previous quarter the company expected the same to be more than $11.70.

The company has lowered its guidance for medical enrollment. Medical membership is now expected in the range of 40-40.2 million compared with the previous expectation of 40.2-40.4 million.

Fully insured membership and self-funded membership are likely to be in the band of 15.1-15.2 million and 24.9-25 million, as against the previously guided range of 15.2-15.3 million and 25-25.1 million, respectively.

Operating revenues are projected in the range of $88.5-$89.5 billion, unchanged from the previous guidance.

Benefit expense ratio is expected to be around 86.8% against the earlier projection of 87%, with adjustment of 30 bps.

SG&A ratio is expected to be around 13.8% compared with the earlier projection of 13.6%, with adjustment of 30 bps

Anthem expects operating cash flow to be more than $4 billion compared with the previous projection of more than $3.5 billion.

Zacks Rank and Performance of Other Peers

Anthem presently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Among other players in the Medical sector that have reported their third-quarter earnings so far, Abbott Laboratories. ABT,    Johnson & Johnson JNJ and UnitedHealth Group Incorporated UNH beat their respective Zacks Consensus Estimate.

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