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Why Is Anthem (ANTM) Down 11.2% Since Last Earnings Report?

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It has been about a month since the last earnings report for Anthem (ANTM - Free Report) . Shares have lost about 11.2% in that time frame, underperforming 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 drivers.

Anthem’s Q2 Earnings Beat Estimates, Increase Y/Y

Anthemdelivered second-quarter 2019 earnings of $4.64 per share, marginally beating the Zacks Consensus Estimate by 0.7%. Additionally, the bottom line improved 9.2% year over year on the back of higher revenues.

Further, Anthem reported operating revenues of $25.2 billion, beating the Zacks Consensus Estimate by 2.1%. Moreover, the top line was up 10.8% year over year, aided by membership growth across businesses and the premium rate increases to cover the overall cost trends. However, this upside was partially offset by the year-long waiver of the health insurance tax in 2019.

Quarterly Operational Update

Medical enrollment inched up 3.3% year over year to 40.9 million members, backed by growth in Medicaid and Medicare, partly offset by the declines in Commercial & Specialty Business enrollment.

Anthem’s benefit expense ratio of 86.7% expanded 330 basis points (bps) from the prior-year quarter. The increase was attributable to one-year waiver of the health insurance tax in 2019 and the medical cost in the Medicaid business.

SG&A expense ratio of 13% contracted 210 bps from the year-ago quarter towing to the year-long waiver of the health insurance tax in 2019 plus growth in the operating revenues.

Strong Segmental Results

Commercial & Specialty Business


Operating revenues were $8.9 billion in the second quarter, down 1.1% year over year. Operating gain totaled $983 million, down 6.2% year over year. This decline is due to the effect of higher favorable risk adjustor adjustments recognized in 2018. Operating margin was 10.4%, down 120 bps year over year.

Government Business

Operating revenues were $15.5 billion, up 14.1% from the prior-year quarter. Operating gain was $478 million, down 10.2% year over year due to persistently elevated medical cost experience in Medicaid across select states and the one-year waiver of the health insurance tax in 2019. However, the same was offset by out-of-period revenue adjustments and Medicare membership improvement.
Operating margin was 3.1%, down 80 bps year over year.

Other

The Other segment’s operating loss of $28 million is wider than the year-earlier quarterly loss of $21 million.

Financial Update

As of Jun 30, 2019, Anthem’s cash and cash equivalents summed $4.1 billion, up 3.7% from 2018 end. As of Jun 30, 2019, its long-term debt less current portion inched up 1.3% to $17.4 billion from the level at 2018 end. Operating cash outflow at the end of the first six months of 2019 was $3.1 billion, up 11.2% year over year.

Capital Deployment

During the second quarter, Anthem bought back shares worth $458 million. As of Jun 30, 2019, the company had shares worth around $4.7 billion remaining under its share buyback authorization. Moreover, the company paid out a quarterly dividend of 80 cents per share, adding up to a distribution of cash worth $206 million. The company announced a third-quarter dividend of 80 cents per share on Jul 23, 2019, payable Sep 25 to shareholders of record on Sep 10, 2019.

Revised Guidance for 2019

Based on solid second-quarter results, Anthem has updated its outlook for 2019. The company’s adjusted net income is now expected to be higher than $19.30 per share, up from the prior projection of $19.20. Medical membership is still estimated in the range of 41-41.3 million, tightened from the earlier expectation of 40.9-41.3 million. Operating revenues are predicted to be around $102 billion including the premium revenues of $93-$94 billion. Operating cash flow is envisioned to be higher than $5.2 billion. SG&A ratio is forecast in the band of 13.2-13.5%.  The company estimates the benefit expense ratio to be 86.2-86.5%.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month.

VGM Scores

At this time, Anthem has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. Following the exact same course, the stock was allocated a grade of A on the value side, putting it in the top 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. Notably, Anthem has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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