Thematic evaluation
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Elevance Health, Inc. (ELV)

October 17, 2024

Compared to: Humana, Inc. (HUM) | Centene Corp. (CNC) | Health Care Select Sector SPDR Fund (XLV)

Our reasoning

Elevance Health appears moderately undervalued based on its strong financial performance, market leadership position, and growth prospects. The company's P/E ratio is below the industry average despite demonstrating above-average ROE, revenue growth, and EPS growth. Additionally, the company's diversified business model and strategic initiatives in expanding healthcare services offer potential for future value creation that may not be fully reflected in the current stock price.

Key takeaways
  • Elevance Health is a profitable company with strong revenue growth, driven by its core insurance and healthcare services businesses.
  • The company has a strong liquidity position and is effectively utilizing its assets to generate profits.
  • Elevance Health is investing heavily in growth initiatives and expansion, which could lead to continued growth in the future.
  • The company's ability to manage its operating expenses and navigate the complex regulatory environment will be critical to its future success.
  • Key risks include managing medical cost trends, maintaining high-quality Medicare Advantage plan ratings, mitigating cybersecurity and data integrity threats, and resolving outstanding legal/regulatory matters.
  • Elevance Health's valuation is currently in line with its peers, reflecting its strong financial performance, growth prospects, and commitment to shareholder returns.
  • The company's stock price has outperformed its peers and the benchmark over the past 3 years, but has underperformed the benchmark over the past 1 and 2 years.
  • Overall, Elevance Health is a well-managed company with a strong track record of financial performance and growth. The company is well-positioned for continued growth in the future, but faces significant risks related to healthcare cost management, regulatory compliance, cybersecurity, and competition.
Undervalued
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Evaluation summary

  1. Company Overview:

    • Elevance Health, Inc. (ELV) is a leading health insurance and services provider in the United States, operating through four segments: Health Benefits, CarelonRx (pharmacy services), Carelon Services (healthcare-related services), and Corporate & Other. The company's core business is providing a broad spectrum of network-based managed care risk-based plans to individual, employer group, Medicaid, and Medicare markets. ELV also provides managed care services to fee-based customers, including claims processing, stop loss insurance, provider network access, medical management, and other administrative services. The company's target market is individuals and families, employers, and government agencies seeking health insurance and related services. For comparative analysis, we will be using the Health Care Select Sector SPDR Fund (XLV) as a benchmark and Humana, Inc. (HUM) and Centene Corp. (CNC) as industry peers.

  2. Financial Performance:

    • Elevance Health has demonstrated strong revenue growth, driven by its core insurance and healthcare services businesses. Revenue increased primarily due to premium rate increases and growth in pharmacy services, partially offset by Medicaid membership declines. The company's profitability has also been strong, as evidenced by its high Net Profit Margin, Return on Average Assets (ROA), and Return on Average Total Equity (ROE). The consolidated benefit expense ratio improved by 10 basis points year-over-year, driven by premium rate adjustments, disciplined medical management, and a shift in the mix of business towards commercial. The adjusted operating expense ratio increased by 50 basis points year-over-year, reflecting elevated investment costs, notably in CarelonRx, as the company invests to control the levers that matter and enhance consumer experiences. The company expects significant improvement in the operating expense ratio in the second half of the year.
    • ELV's ROA, ROE, and ROIC have been consistently above the industry average, indicating efficient asset utilization and strong profitability. Compared to its peers, ELV has outperformed both HUM and CNC in terms of profitability metrics, suggesting a more efficient and effective business model.

  3. Operational Efficiency:

    • Elevance Health has a strong liquidity position, as evidenced by its significant cash holdings and investments. The company's Current Ratio is slightly higher than the industry average, indicating a strong ability to meet its short-term obligations. The company's working capital management efficiency is improving, as evidenced by the decrease in Changes in Working Capital.
    • Elevance Health is generating strong cash flow from operations, as evidenced by the increasing Funds from Operations. The company is investing heavily in growth initiatives and expansion, as indicated by the increasing Total Capital Expenditure. The company's FCF margin has been decreasing, which could be due to increased investments or changes in the timing of cash flows.
    • The company's debt service coverage is strong, as indicated by the high Cash Flow / Total Debt ratio. The company has a moderate level of financial leverage, with a Total Debt to Total Equity Ratio slightly lower than the industry average.
    • Elevance Health is effectively utilizing its assets to generate revenue and profits, as indicated by its strong Return on Average Assets and Return on Average Total Equity. The company's working capital management efficiency is improving, as evidenced by the decrease in Changes in Working Capital.
    • ELV's operational efficiency is superior to its peers, as evidenced by its higher cash flow generation, lower debt levels, and more efficient asset utilization.

  4. Growth Opportunities:

    • Elevance Health is well-positioned for continued growth in the future, driven by its strong financial performance, strategic focus on expanding its healthcare services offerings, and commitment to shareholder returns. The company is expanding its presence in government programs and public exchanges, enhancing its pharmacy and healthcare services capabilities, and optimizing its operations.
    • The company is making progress on its enterprise strategy to accelerate capabilities and services, invest in high-growth opportunities, and optimize its Health Benefits business. Carelon Services is delivering strong and accelerating growth, with a long runway ahead, while CarelonRx is integrating recent acquisitions and scaling key value drivers.
    • The company's recent acquisitions of BioPlus (specialty pharmacy) and Paragon Healthcare (infusion services) are expected to contribute to future growth. The company is also investing in strategic partnerships, such as the formation of Augusta, a new company combining Carelon assets with other care delivery businesses.
    • ELV's growth strategy is focused on expanding its healthcare services offerings, particularly in the pharmacy and healthcare-related services segments. The company's recent acquisitions and partnerships are expected to drive future growth.

  5. Risks and Threats:

    • The company's ability to accurately predict and manage healthcare costs, utilization, and medical cost trends is a significant risk factor. The company is closely monitoring acuity and cost trends, notably in Medicaid, and is working collaboratively with states to ensure rates remain actuarially sound. The company expects second-half utilization to increase in Medicaid, and as a result, anticipates the full-year benefit expense ratio will end the year in the upper half of the initial guidance range.
    • The potential for reduced enrollment and membership losses, especially in concentrated geographic markets, is a concern. The company is facing changes to the business environment as elected officials enact new laws and regulations, including changes to taxes, fees, and government program requirements. Growth in government-sponsored business, such as Medicare and Medicaid, exposes the company to increased regulatory oversight. Expanding participation in Individual state/federal health insurance marketplaces (Public Exchanges) as Medicaid eligibility redeterminations lead to membership shifts.
    • Compliance with complex government regulations for Medicare, Medicaid, and other programs is a major challenge. The company is facing ongoing multi-district antitrust litigation related to Blue Cross Blue Shield Association and licensee agreements. A lawsuit was filed by the U.S. Department of Justice alleging false Medicare risk adjustment data submissions. Investigations into risk adjustment practices at CareMore and HealthSun subsidiaries, with potential repayments to CMS.
    • Cybersecurity and data privacy/integrity risks, including potential for breaches and system disruptions, are a growing concern.
    • The ability to maintain and improve Medicare Advantage Star ratings to qualify for quality-based bonus payments is crucial. The company is facing funding cuts and is taking a disciplined approach to its 2025 bids to balance growth and margins.
    • Potential liability from litigation, government investigations, and regulatory actions is a significant risk.
    • Integration and execution risks related to mergers, acquisitions, and strategic partnerships are a challenge.
    • ELV faces significant risks related to healthcare cost management, regulatory compliance, cybersecurity, and competition. The company's ability to navigate these risks will be critical to its future success.

  6. Valuation Analysis:

    • Elevance Health's valuation metrics, such as P/E and EV/EBITDA, are currently in line with its peers. The company's valuation is supported by its strong financial performance, growth prospects, and commitment to shareholder returns.
    • Compared to its peers, ELV's valuation is slightly higher, reflecting its superior financial performance and growth prospects. However, the company's valuation is still considered reasonable given its strong fundamentals.

  7. Price Performance:

    • Elevance Health's stock price has outperformed the Health Care Select Sector SPDR Fund (XLV) over the past 3 years. However, the stock has underperformed the benchmark over the past 1 and 2 years.
    • Compared to its peers, ELV's stock price has consistently outperformed both HUM and CNC across all historical periods analyzed. This outperformance is particularly notable over longer periods, such as the 3-year period, where ELV has significantly outpaced its peers.
    • ELV's stock price has been more volatile than XLV, but less volatile than HUM. This suggests that ELV may be a more stable investment option, offering consistent returns with less risk.

  8. Future Outlook:

    • Elevance Health is well-positioned for continued growth in the future, driven by its strong financial performance, strategic focus on expanding its healthcare services offerings, and commitment to shareholder returns. The company's ability to manage its operating expenses and navigate the complex regulatory environment will be critical to its future success.
    • The company's management has expressed confidence in its ability to deliver on its enterprise growth algorithm, targeting at least 12% annual growth in adjusted diluted earnings per share, driven by upper single-digit revenue growth and disciplined expense management.
    • Analyst estimates for ELV's future earnings growth are generally positive, suggesting that the company is expected to continue to perform well in the coming years.

  9. Summary:

    • Elevance Health is a profitable company with strong revenue growth, driven by its core insurance and healthcare services businesses. The company has a strong liquidity position and is effectively utilizing its assets to generate profits.
    • ELV is investing heavily in growth initiatives and expansion, which could lead to continued growth in the future. The company's ability to manage its operating expenses and navigate the complex regulatory environment will be critical to its future success.
    • Key risks include managing medical cost trends, maintaining high-quality Medicare Advantage plan ratings, mitigating cybersecurity and data integrity threats, and resolving outstanding legal/regulatory matters.
    • ELV's valuation is currently in line with its peers, reflecting its strong financial performance, growth prospects, and commitment to shareholder returns. The company's stock price has outperformed its peers and the benchmark over the past 3 years, but has underperformed the benchmark over the past 1 and 2 years.
    • Overall, Elevance Health is a well-managed company with a strong track record of financial performance and growth. The company is well-positioned for continued growth in the future, but faces significant risks related to healthcare cost management, regulatory compliance, cybersecurity, and competition.
Peer fundamentals 
Fundamentals
Insights
  • Elevance Health is a profitable company with strong revenue growth, driven by its core insurance and healthcare services businesses.
  • The company has a strong liquidity position and is effectively utilizing its assets to generate profits.
  • Elevance Health is investing heavily in growth initiatives and expansion, which could lead to continued growth in the future.
  • The company's ability to manage its operating expenses and navigate the complex regulatory environment will be critical to its future success.
  • Key risks include managing medical cost trends, maintaining high-quality Medicare Advantage plan ratings, mitigating cybersecurity and data integrity threats, and resolving outstanding legal/regulatory matters.
Analysis
  • Revenue - Elevance Health is experiencing strong revenue growth, driven by its core insurance and healthcare services businesses. - The company's recent acquisitions of BioPlus and Paragon Healthcare are likely contributing to the increase in revenue. - The company's revenue growth is expected to continue in the future, driven by its strategic focus on expanding its healthcare services offerings.
    • Profitability
      • Elevance Health is a highly profitable company, as evidenced by its strong Net Profit Margin, Return on Average Assets, and Return on Average Total Equity.
      • The company's profitability is expected to continue to grow in the future, driven by its strategic focus on expanding its healthcare services offerings and managing its operating expenses effectively.
    • Liquidity
      • Elevance Health has a strong liquidity position, as evidenced by its significant cash holdings and investments.
      • The company's Current Ratio is slightly higher than the industry average, indicating a strong ability to meet its short-term obligations.
    • Solvency
      • Elevance Health has a moderate level of financial leverage, with a Total Debt to Total Equity Ratio slightly lower than the industry average.
      • The company's debt service coverage is strong, as indicated by the high Cash Flow / Total Debt ratio.
    • Operational Efficiency
      • Elevance Health is effectively utilizing its assets to generate revenue and profits, as indicated by its strong Return on Average Assets and Return on Average Total Equity.
      • The company's working capital management efficiency is improving, as evidenced by the decrease in Changes in Working Capital.
    • Cash Flow Analysis
      • Elevance Health is generating strong cash flow from operations, as evidenced by the increasing Funds from Operations.
      • The company is investing heavily in growth initiatives and expansion, as indicated by the increasing Total Capital Expenditure.
      • The company's FCF margin has been decreasing, which could be due to increased investments or changes in the timing of cash flows.
    • Risk Factors
      • The company's ability to accurately predict and manage healthcare costs, utilization, and medical cost trends is a significant risk factor.
      • The potential for reduced enrollment and membership losses, especially in concentrated geographic markets, is a concern.
      • Compliance with complex government regulations for Medicare, Medicaid, and other programs is a major challenge.
      • Cybersecurity and data privacy/integrity risks, including potential for breaches and system disruptions, are a growing concern.
      • The ability to maintain and improve Medicare Advantage Star ratings to qualify for quality-based bonus payments is crucial.
      • Potential liability from litigation, government investigations, and regulatory actions is a significant risk.
      • Integration and execution risks related to mergers, acquisitions, and strategic partnerships are a challenge.
    • Future Outlook
      • Elevance Health is well-positioned for continued growth in the future, driven by its strong financial performance, strategic focus on expanding its healthcare services offerings, and commitment to shareholder returns.
      • The company's ability to manage its operating expenses and navigate the complex regulatory environment will be critical to its future success.
      • Key metrics to monitor in upcoming quarters include revenue growth, profitability, cash flow, and debt levels.
Most recent earnings report
Financial statements 
All public filings
Comparative Analysis
Benchmarks (as of 2024-10-15)
Health Care Select Sector SPDR Fund (XLV)
  • Performance Comparison:
    • ELV has underperformed XLV over most of the historical periods analyzed, with the exception of the 3-year period, where it outperformed by 3.07%. This suggests that ELV's performance has been less consistent than XLV's.
  • Risk and Return Analysis:
    • ELV has provided lower annualized returns than XLV over the 1-year, 2-year, and 3-year periods. However, ELV's annualized volatility has generally been higher than XLV's, indicating that ELV has been more volatile than XLV.
    • ELV's maximum drawdown has been larger than XLV's, indicating that ELV has a higher risk profile. This is further supported by the fact that ELV has experienced more frequent significant drawdowns than XLV.
  • Risk-Adjusted Performance:
    • ELV's Sharpe Ratio has generally been lower than XLV's, indicating that XLV has offered a better risk-adjusted return over the period. This suggests that XLV has been more efficient in generating returns relative to its risk.
    • ELV's beta has generally been below 1, indicating that it has been less volatile than the overall market. However, its beta has been more volatile than XLV's, indicating that its risk profile may be more sensitive to market fluctuations.
  • Overall Assessment:
    • ELV has underperformed XLV over most of the historical periods analyzed, with the exception of the 3-year period. This suggests that ELV's performance has been less consistent than XLV's.
    • ELV has a higher risk profile than XLV, as evidenced by its larger maximum drawdown, more frequent significant drawdowns, and higher annualized volatility.
    • While ELV's beta suggests that it is less risky than the overall market, its volatility and risk-adjusted performance have been less favorable than XLV's.
    • Overall, the analysis suggests that XLV has been a more consistent and efficient investment than ELV over the period analyzed.
Peers Price History(as of 2024-10-15)
Humana, Inc. (HUM)Centene Corp. (CNC)
  • Performance Comparison: Elevance Health, Inc. (ELV) has consistently outperformed both Humana, Inc. (HUM) and Centene Corp. (CNC) across all historical periods analyzed. This outperformance is particularly notable over longer periods, such as the 3-year period, where ELV has significantly outpaced its peers.
  • Risk and Return Analysis: ELV has delivered higher annualized returns than HUM and CNC across all periods. However, it's important to note that ELV's returns have come with lower volatility compared to HUM, which has exhibited significantly higher volatility. This suggests that ELV may be a more stable investment option, offering consistent returns with less risk.
  • Risk-Adjusted Performance: ELV's Sharpe ratio has consistently been higher than HUM's and CNC's, indicating that ELV has generally provided better risk-adjusted returns. This suggests that ELV has been more efficient in generating returns relative to the risk it takes on. ELV's beta values consistently below 1 suggest a lower risk profile compared to the broader market, further supporting its strong risk-adjusted performance.
  • Overall Assessment: Elevance Health, Inc. (ELV) has demonstrated a compelling combination of strong performance, lower volatility, and better risk-adjusted returns compared to its peers, Humana, Inc. (HUM) and Centene Corp. (CNC). While HUM has shown higher returns in some periods, its significantly higher volatility makes it a riskier investment. CNC has exhibited moderate performance and volatility, falling between ELV and HUM. Based on the analysis, ELV appears to be a more attractive investment option for investors seeking a balance of growth and stability.
Peers Fundamentals(as of 2024-06-30)
Humana, Inc. (HUM)Centene Corp. (CNC)

  1. Market Position and Size:

    • ELV is the largest company in the peer group, with a market cap significantly larger than Humana, Inc. (HUM) and Centene Corp. (CNC).
    • This size advantage is reflected in ELV's larger revenue, net income, and total assets compared to its peers.
    • ELV's dominant market position suggests a strong brand recognition and a significant presence in the managed healthcare industry.

  2. Profitability and Efficiency:

    • ELV demonstrates strong profitability, consistently outperforming its peers and industry averages in metrics like Net Profit Margin and Return on Average Total Equity.
    • This indicates that ELV is more efficient at converting revenue into profit and utilizing its resources to generate returns compared to its competitors.
    • ELV's profitability advantage suggests a strong competitive position and a focus on operational efficiency.

  3. Financial Health and Stability:

    • ELV exhibits strong financial health, characterized by high profitability, efficient returns, and a healthy liquidity and solvency position.
    • Its Current Ratio and Total Debt to Total Equity Ratio are generally in line with its peers and industry averages, indicating a stable financial position.
    • ELV's strong financial health suggests a low risk profile and a solid foundation for future growth.

  4. Valuation and Market Perception:

    • ELV's valuation metrics are generally higher than its peers and industry averages, suggesting that investors perceive ELV as a more valuable company.
    • This premium valuation may be attributed to ELV's strong profitability, efficient returns, and dominant market position.
    • The market's positive perception of ELV is reflected in its higher valuation compared to its peers.

  5. Cash Flow and Capital Management:

    • ELV's cash flow generation is lower than its peers, despite its larger market cap, suggesting potential inefficiencies in converting profits into cash flow.
    • This may indicate that ELV is investing heavily in growth initiatives or facing challenges in managing its working capital.
    • ELV's lower cash flow generation is a potential area of concern for investors, as it may limit its ability to reinvest in growth or return capital to shareholders.

  6. Growth and Future Prospect:

    • ELV's growth trends show mixed results compared to its peers. While it has consistently outperformed in terms of Net Income and Basic Earnings per Share growth, it has lagged behind in terms of Sales/Revenue, Free Cash Flow, and Total Assets growth.
    • This suggests that ELV's growth is primarily driven by profitability improvements rather than expansion.
    • ELV's growth is decelerating, with recent year-over-year growth rates lower than its 5-year CAGRs for several key metrics.
    • This deceleration in growth may indicate a maturing business model or challenges in maintaining its growth momentum.

  7. Potential for Investment:

    • ELV presents an attractive investment opportunity, considering its strong profitability, efficient returns, and healthy financial position.
    • However, investors should be aware of its lower cash flow generation and decelerating growth rates.
    • ELV's strong earnings and potential for continued profitability improvements could justify its premium valuation, but investors should monitor its growth trajectory and cash flow generation.

  8. Key Risks and Considerations:

    • ELV's lower cash flow generation compared to its peers is a potential risk, as it may limit its ability to reinvest in growth or return capital to shareholders.
    • The deceleration in ELV's growth rates for several key metrics suggests that its growth may be slowing down, which could impact its future performance.
    • ELV's potential reliance on cost-cutting measures to drive profitability may not be sustainable in the long term, as it could lead to operational inefficiencies or customer dissatisfaction.

  9. Overall Assessment:

    • ELV is a financially strong company with a dominant market position and a track record of strong profitability and efficient returns.
    • However, its lower cash flow generation and decelerating growth rates are potential areas of concern for investors.
    • Overall, ELV remains an attractive investment opportunity, but investors should carefully consider its growth trajectory and cash flow generation before making any investment decisions.