Anthem Inc. (ANTM - Free Report) is going through a tough phase with niggling concerns like uncertainty over the Cigna deal, weakness in public exchange business and low interest rates among others. These factors have led to investors’ pessimism over the stock which has seen its value fall 10.2% year to date.
Last year, the stock gained 12.4% on optimism surrounding the announcement of the Cigna deal and growing business opportunity from the public exchange business. But 2016 did not turn out as anticipated for the company.
Anthem's proposed acquisition of Cigna Corp. (CI - Free Report) has drawn flak from regulators. The Department of Justice (DoJ) has sued to block the merger with Cigna on concerns that it could stifle competition in the industry. The merged 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 tie them up in months of litigation, dragging out deal that was announced about a year ago. If the merger with Cigna falls apart, Anthem will have to pay a breakup fee of $1.85 billion.
The company is also witnessing losses on its public exchange business like UnitedHealth Group Inc. (UNH - Free Report) and Aetna Inc. (AET - Free Report) . For 2016, the company expects a membership decline of approximately 300,000 in its individual business. It also expects to see a “mid-single-digit” margin loss for 2016 in this business instead of its prior expectation of a slight profitability.
The persistent low interest rate environment has also taken a toll on Anthem’s investment income. For 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 2015 level.
The company 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. Also, the company expects the Medicaid business to remain at elevated levels throughout the year. This includes worse-than-expected results in the newly implemented Iowa market.
The share repurchase suspension in the wake of Cigna deal has affected the bottom line.
We believe the Anthem stock, carrying a Zacks Rank #4 (Sell), will continue to slide till its headwinds subside and its road ahead becomes clear. Short-term investors can shift their focus from Anthem at least for the time being and bet their bucks on other lucrative counters. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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