On Sep 14, Zacks Investment Research downgraded Anthem Inc. (ANTM - Free Report) to a Zacks Rank #4 (Sell).
Why the Downgrade?
Anthem witnessed downward estimate revisions over the past 60 days. The stock seems to be bothered by a number of factors working against it such as uncertainty over the Cigna deal, weak public exchange business and low interest rates.
Anthem's proposed acquisition of Cigna Corp. (CI - Free Report) has drawn friction from regulators. The Department of Justice (DoJ) has blocked the merger of Cigna over concerns that it could stifle competition in the industry. The merger of Anthem and Cigna would mean more power in the hands of the surviving company – Anthem – which will gain in size and scale.
Though Anthem will challenge the lawsuit filed by the DoJ, it will entangle both parties in months of litigation, dragging the deal that was announced about a year ago. If the merger with Cigna falls apart, the company will have to pay a breakup fee of $1.85 billion.
Anthem is also witnessing losses on its public exchange business like UnitedHealth Group Inc. (UNH - Free Report) , Aetna Inc. to name a couple. For 2016, the company expects membership declines of approximately 300,000 in its individual business. It also expects to see “mid-single-digit” margin loss in this business.
The persistent low interest rate environment has also taken a toll on Anthem’s investment income. In 2015, net investment income declined 6.5% year over year to $677.6 million. For 2016, the company projects investment income of approximately $650 million, which translates into a year-over-year decline of 4% from the actual 2015 level.
Anthem also expects medical loss ratio in the range of 84.9% plus or minus 30 basis points for the year, reflecting higher-than-previously-expected claims rates in its Individual ACA compliant plans as well as its Medicaid businesses remain at elevated levels. This includes worse-than-expected results in the newly entered Iowa market.
The share repurchase suspension in the wake of the Cigna deal has affected the bottom line.
The Zacks Consensus Estimate have moved down by a penny for 2016 and 14 cents for 2017 in the last 60 days. The same is currently pegged at $10.91 and $11.85 for 2016 and 2017, respectively.
Stocks to Consider
Not all consumer discretionary stocks, however, are performing as poorly as Anthem. Some better-ranked stocks in this space are UnitedHealth Group Inc. (UNH - Free Report) and Humana Inc. (HUM - Free Report) , each carrying a Zacks Rank #2 (Buy).You can see the complete list of today’s Zacks #1 Rank stocks here.
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