Elevance Health Inc (NYSE:ELV) (previously known as Anthem) remains one of the leading health insurers in the U.S., providing medical benefits to roughly 45 million medical members. The company is also the largest single provider of Blue Cross Blue Shield branded coverage, operating as the licensee for the Blue Cross Blue Shield Association in 14 states, as of 2021.
According to BofA analysts, COVID spikes have led to lower core utilization costs for managed care organizations as the industry tries to return prices to normalizing trends. Fortunately, this can position firms such as Elevance for a multi-year tailwind of outperformance as it takes costs longer to normalize.
Elevance Health is offering a dividend yield of 1.04% or $5.12 per share annually, through quarterly payments, with an inconsistent track record of increasing its dividend payments.
BofA Securities Analysts: On September 9, research analyst for BofA Securities, Kevin Fischbeck, upgraded Elevance from Neutral to Buy with a price target of $575, representing an 18% upside.
Key Takeaways: The $575 price target is based on 17.8 times the company's 2023 expected earnings per share, which is above the five-year average of 14.3 times, reflecting the more diversified business mix, as well as multiple levers to grow its commercial margins and expanding services business.
The analyst mentioned that managed care organizations are well positioned to pass off rising inflation onto customers, as the 2023 trends should reflect higher unit cost, leading to an over 6% commercial cost trend that may accelerate into 2024 as more contracts are due for renewal.
According to Fischbeck, managed care organizations (MCOs) are prepared to pass through rising inflation into interest rates, as pricing appears to be less competitive, adding a tailwind to growth.
Furthermore, managed care organizations are more protected from recession, since rising interest rates lift yields on statutory capital for MCOs.
When the trend being predictably high for MCO renewal plans, managed care organizations such as Elevance can make appropriate pricing adjustments, providing margin tailwinds.
Lastly, the analysts explained that if the unemployment rate were to triple, companies such as Elevance could offset its lost revenue by higher Medicaid and Exchange based coverage, and the mix shift to lower margin businesses would represent a modest 2% EPS headwind.
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Downside Risk: Risks to the downside are more immediate than an expected rebound in utilization, with a more competitive pricing environment, Medicaid redetermination impact on revenue and government rate pressure, the analysts mentioned.
