Why Is Anthem (ANTM) Down 3% Since Last Earnings Report?

It has been about a month since the last earnings report for Anthem (ANTM). Shares have lost about 3% in that time frame, outperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Anthem due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Anthem's Q4 Earnings Miss Estimates, Rise Y/Y

Anthem’s fourth-quarter earnings of $3.88 per share missed the Zacks Consensus Estimate of $3.90 by 0.5% due to high expenses. However, the bottom line surged 59% year over year, driven by solid revenues and the successful launch of IngenioRx.

Anthem posted operating revenues of $27.1 billion, surpassing the Zacks Consensus Estimate by 1%. The top line was also up 16.4% year over year, boosted by higher premium revenues derived from membership growth across all businesses as well as rate surges to cover overall cost trends. The results were supported by growth in value-added services including pharmacy and integrated health offerings, partially offset by the one-year waiver of the health insurance tax in 2019.

Quarterly Operational Update

Anthem’s benefit expense ratio of 89% improved 220 basis points (bps) from the prior-year quarter, aided by the one-year waiver of the health insurance tax in 2019. SG&A expense ratio of 12.9% contracted 260 bps from the year-ago quarter on the back of growth in operating revenues and a year-long waiver of the health insurance tax in 2019. Total expenses of the company increased 15.2% year over year to $26.3 billion.

Strong Segmental Results

Commercial & Specialty Business

Operating revenues of $9.3 billion in the fourth quarter rose 5.5% year over year. Operating gain totaled $535 million, up 69.3% year over year, led by the launch of IngenioRx and a greater penetration of value-added services. However, the same was partially offset by margin normalization in the Individual business. Operating margin was 5.7%, up 210 bps year over year.

Government Business

Operating revenues of $16.2 billion ascended 12.6% from the prior-year quarter. Operating gain was $583 million, up 29.3% year over year. This uptick reflects the impact of higher premiums from rate adjustments and more members in the Medicaid business. However, the same was offset to some extent by higher selling, general and administrative expenses. Operating margin was 3.6%, expanding 50 bps year over year.

Other

The Other segment generated operating revenues of $3.8 billion skyrocketed 835.5% year over year. However, this segment incurred an operating loss of $20 million, wider than $17 million in the year-earlier period.

Financial Update

As of Dec 31, 2019, Anthem had cash and cash equivalents of $4.9 billion, up 25.5% from 2018-end level. As of Dec 31, 2019, its long-term debt inched up 3.3% to $17.7 billion from the figure at 2018 end. Operating cash outflow was $1.3 billion for the fourth quarter of 2019.

Capital Deployment

During the fourth quarter, the company paid out a quarterly dividend of 80 cents per share, leading to a distribution of cash totaling $202 million.   Moreover, the company announced a first-quarter 2020 dividend of 95 cents per share, payable Mar 27 to its shareholders as of Mar 16, 2020. The company also bought back shares worth $306 million during the quarter under review. As of Dec 31, 2019, it had $3.8 billion board-approved share repurchase authorization left.

Full-Year Update

For 2019, operating revenues totaled $103.1 billion, up 12.9% year over year. As of Dec 31, 2019, Medical enrollment inched up 2.7% year over year to 41 million members. This upside was primarily driven by higher total risk enrollment, fee-based enrollment, Government Business enrollment and Commercial & Specialty Business enrollment. Operating cash flow of the year soared 58.4% year over year to $6.1 billion.

Guidance for 2020

Following the company’s fourth-quarter results, Anthem issued its outlook for 2020. Adjusted net income for the current year is projected to be more than $22.30 per share. Medical membership is expected in the range of 41.9-42.3 million. Operating revenues are anticipated around $117 billion including premium revenues of $101-$103 billion. Also, the company estimates operating cash flow of more than $6.4 billion. The company predicts the benefit expense ratio at 85.8%, plus or minus 50 basis points. For the current year, investment income is expected to be $970 million.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month. The consensus estimate has shifted -7.94% due to these changes.

VGM Scores

At this time, Anthem has a great Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the second 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.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Anthem has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.

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