ELV - Elevance Health: Attractive On Its Expansion Catalysts

Summary

• ELV generated outstanding revenue growth, owing to its improving medical membership growth.
• Despite the expected end of Medicaid's continued coverage, ELV is well-positioned to continue growing.
• This is thanks to the company's meaningful acquisitions and diversified product portfolio.
• ELV remains liquid and remains fundamentally undervalued, making the stock attractive.

Elevance Health ( ELV ) is one of the largest health benefits companies in the US, serving more than 47.5 million medical memberships at present. It is expected to end 2023 with a total medical membership range of 47.4 million to 48.5 million. The end of the Medicaid continuous coverage rule on April 1, 2023, could bring a shift in the healthcare industry as it may result in a potential decline in Medicaid membership. According to the management, there may be a slowdown in its Medicaid membership growth as the eligibility of some beneficiaries will be redetermined and some may lose their coverage. In fact, they expect that Medicaid membership will end the year in the range of 10.8 million to 11.3 million due to the associated attrition, down from 11.5 million recorded in FY'22. Despite the potential slowdown, the management expects continued growth in total premium revenue amounting to $160 billion in FY'23, up 5.1%, from $133.2 billion in FY'22. ELV currently boasts an improving operational efficiency as shown in its improving adjusted earnings per share amounting to $29.07 in FY'22 up 11.9% from $25.98 recorded in FY'21. Finally, Elevance Health remains financially liquid with an investment-grade credit rating and is currently trading below the Street's target price.

Company Overview

The management's apparent confidence in their ability to weather this slowdown in Medicaid membership as mentioned earlier and maintain a strong FY'23 is a positive sign for the company. ELV's diversification of offerings and the management's ability to adapt to changes in the market can help ensure the long-term stability and growth of the company. In fact, they are already seeing growth in their fee-based membership, as quoted below.

Fee-based membership is expected to grow by approximately 600,000 members at the midpoint to 27.1 million to 27.4 million at year-end 2023. The wider-than-normal range contemplates a variety of scenarios related to coverage shifts out of Medicaid, and into employer-sponsored plans and the relatively uncertain macroeconomic backdrop. We expect approximately one-third of this growth to occur in the first quarter with the balance more heavily concentrated in the back half of the year as consumers transition from Medicaid to commercial coverage. Source: Q4 Earnings Call Transcript

They are now prioritizing improving their connected care services, which can help improve health outcomes and provide high-quality health services. In fact, they announced their new operating segment reflecting their new key priorities.

Beginning with the first quarter of 2023, we will evolve our external reporting to better align with this approach and begin to report Carelon split between Carelon Rx and Carelon Services, while we combine our commercial and government health benefits operations for reporting purposes into a single health benefit segment. Source: Q4 Earnings Call Transcript

With these approaches, investors can see ELV's performance regarding its two core operations, which are providing high-quality health benefits and health services. In fact, it has made a few interesting acquisitions that could be sources of growth in its health services portfolio, as quoted below.

Inside Elevance Health, we are also directly addressing fast-growing areas of cost trend. In November, we announced the acquisition of BioPlus, the largest independent specialty pharmacy provider offering a complete range of specialty pharmacy services for patients living with complex and chronic conditions. Source: Q4 Earnings Call Transcript

According to the management, this acquisition will be integrated into its Carelon Rx, which will allow the pharmacy team at BioPlus to identify patients who may benefit from behavioral health support or in-home care services, and then easily connect them to the relevant services, which overall improves the health care experience.

Additionally, ELV is also expanding into a new market, as stated in the quote below. As a result of this, it will give an opportunity to address health care for people living in Louisiana.

Upon closing, Blue Cross and Blue Shield of Louisiana will be our 15th Blue state, providing us with deep local roots in a new market, while we bring national scale and access to our portfolio of innovative solutions and capabilities to support the community. We're looking forward to accelerating Blue Cross and Blue Shield of Louisiana strategy to make an even greater difference in the health and lives of the 1.9 million individuals they serve.

Blue Cross some Blue Shield plans are at our best when we collaborate. Together, the Blue system provides health benefits to nearly 15 million consumers across all 50 states. Source: Q4 Earnings Call Transcript

Overall, this will help ELV to drive revenue growth as mentioned earlier and according to the management, they expect total revenue to continue growing by 5.4% YoY and expect continued improvement on their margins.

We expect operating gain for the year to be greater than $9.35 billion, reflecting growth of at least 10% over 2022, again, being the primary driver of growth in adjusted earnings per share. Source: Q4 Earnings Call Transcript

Delivering Better Entry Point

ELV is basically consolidating around today's level, according to its weekly chart. The current sentiment from its moving averages, which show that its current price is trading below the 20- and 50-day moving averages, suggests that the stock may retest its $440 support level. Although the MACD indicator showed a bearish crossover, it did not spark the interest of the bears much. I believe that a possible price correction will give a better entry point in the next few trading weeks. I am also looking for its MACD indicator to show a bullish crossover or to have at least a bullish divergence above its $440 support level.

ELV And CI Are Both Attractive

Humana Inc. ( HUM ), Cigna Corporation ( CI ), UnitedHealth Group Incorporated ( UNH )

ELV trades cheaper than its dividend-paying peers, as can be seen in the chart above. It is just trading at a Non-GAAP forward P/E of 14.59x cheaper than its peers' average of 15.68x and cheaper forward EV/EBITDA of 10.62x than the peers' average of 11.39x. In fact, ELV is cheap on its historical basis as well, as it trades below its 5-year P/E average of 17.31x and 5-year EV/EBITDA average of 12.72x. Additionally, ELV trades at a trailing P/E of 16.48x, cheaper than its bigger peer UNH as well as HUM. ELV has a $5 billion freshly approved share repurchase authorization that was issued on January 24, 2023, making this company more appealing, especially on a potential pullback. This should improve the current risk/reward ratio as compared to the street's average target price of $567.90 .

Taking a look at CI reveals that this company might be a safer long-candidate, especially considering that its forward P/E of 11.65x is the cheapest among its peer group. Furthermore, looking at its dividend yield of 1.70%, which is better than ELV's 1.24%, makes it even more attractive, as of this writing. Based on the chart below, CI is trading attractively above its 50-day simple moving average, implying some bullish price action to monitor.

CI ended its fiscal year 2022 with impressive revenue growth, reaching $180,642 million, a significant increase from $174,078 million in the previous fiscal year. This resulted in a spectacular 24% year-over-year growth in its (GAAP) net income, outpacing ELV, which witnessed a fall to $6,019 million in FY'22, down 1.2% from $6,095 million in FY'21. Additionally, with its cheap multiples, the Street's target price of $354.74 seems reasonable, making the stock attractive as well.

Conclusive Thoughts

Despite recent weakness, particularly its losing investments as seen by a $550 million loss on financial instruments driving down its bottom line, ELV remains appealing with its projected margin expansion despite aggressive acquisitions and, notably, its share repurchase catalyst. ELV remains liquid, with an interest coverage ratio of 10.17x, up from a 5-year average of 9.05x. Furthermore, ELV ended the year with a better debt-to-equity ratio of 0.66x, compared to UNH's 0.71x and CI's 0.70x. This makes ELV an appealing long-term prospect.

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