Anthem Has 70+% Annualized RoR - Moving To A 'Hold'
- Since my first article on Anthem, this company has outperformed the market by a fair margin. The upsides I forecasted have materialized in the valuation.
- It's important to know when it's time to shift your stance on an investment - in my view, the right time for a shift in stance on ANTM is now.
- I view it as a "HOLD" now. Learn why here.
- I do much more than just articles at iREIT on Alpha: Members get access to model portfolios, regular updates, a chat room, and more. Learn More »
I've written about Anthem (ANTM) a few times, and I'm invested in the company in my market-outperforming core portfolio. The key to market outperformance (or one of them), to my mind, is the ability to pick up companies on the cheap and to know when to stop picking up shares when they are no longer cheap.
Back in February of 2021, this was cheap. Since then, this investment has more than doubled the S&P 500.
(Source: Anthem Article)
In fact, I've stayed bullish for almost the entirety of 2021.
That changes today.
What has been an over 60% growth in less than a year has now become valued at a multiple I can no longer "get along" with.
Let me show you why.
How has the company been doing?
Anthem needs no introduction because I introduced it thoroughly in my first and subsequent articles.
The company delivers health care insurance and has done so for decades. Through its BCBSA, it's one of the largest health care insurers in all of the US, covering over 106 million people, with Anthem alone having 41 million.
Recent results confirm the growth trajectory I forecasted and expected in my articles. Revenue growing by 16% YoY, enrollment increasing by 2.4 million members, and raising its full-year guidance is all just part of great performance - which we saw in 3Q21.
These results came in high despite continued COVID-19 challenges which naturally impact Anthem, as they would any company in the segment. Since the beginning of the pandemic, Anthem has continually pushed digitization and new technologies to create a sort of whole-person healthcare in order to deliver its goal of lowering medical costs. This is a goal we've been though in the past Anthem articles - the company is expecting to be able to deliver cost cuts toward the TPI rate (tax and price index) by 2025.
Anthem is also starting to implement more and more virtual care models, and ways to customize digital-first health care. Anthem also remains one of the largest winners of new businesses to date.
As a result, our focus on reducing health disparities and inequities remains vital to the value Anthem offers day partners. This is reflected in our momentum along with our 100% RFP win rate year-to-date.
(Source: Anthem Earnings Call)
Overall, the company managed strong growth in its commercial and other business lines, with robust selling and higher enrolment. Anthem remains the largest health insurer in all of the USA by membership. There's little to comment on these earnings, beyond that they were beyond even the expectations of the market a year ago or so, reflected by another guidance increase.
EPS growth was 62% YoY, showcasing the company's strength despite a problematic backdrop. Much of the company's outperformance comes, however, not from its regular business operations in healthcare, but from its alternative investment portfolio. The increased guidance for income also reflects expectations from investments, almost a quarter of a billion above the initial outlook in the beginning of the year.
The company doesn't discuss at this point the exact size and scope of the COVID-19 net headwind, instead continuing to guide for a total COVID-19/Non-COVID-19 combined costs, and expect a more or less similar headwind 4Q21 from COVID-19 relative to prior guidance. In short, there's potential variance to the guidance here.
In addition, there are company tailwinds here from Medicaid eligibility resuming. Combined with the investment upside, this tailwind is expected by the company to outperform any headwind and keep the company on a forward growth trajectory.
Anthem expects a 2022E EPS growth of around 12%, adjusting for investments.
The company's rock-solid fundamentals, which were among my reasons for investments, remain. Anthem is A rated with a sub-40% long-term debt to capital. It's the largest US healthcare insurance provider and has a current market cap of almost $115 billion.
Based on performance this year, performance historically, and current trends, it's unlikely that we'll see a downturn for Anthem in the near term. I also want to mention that Anthem has often been named, by consumers, as the best overall insurer and best insurer for young adults - so the love for the company can be seen beyond investors, and in consumers as well.
This company has been one of my better investments this year. Not the best by far, but it's a good example of what can happen when the correlated potential upsides based on undervaluation and superb quality align and the market starts realizing its "mistake".
That is what happened here.
Let's look at what has changed.
What is the valuation?
What hasn't changed is the company quality. This would be enough for many investors to keep investing - but not for me. I'm a valuation-focused investor.
When I bought Anthem, the company believed it was worth around 12X normalized P/E. That P/E has now expanded to almost 18X. This is an annualized RoR of 71.4%.
(Source: F.A.S.T Graphs)
However, the flip side of this is that the company is now trading at multiples that you can see, it usually doesn't sustain for all that long. In fact, 18X P/E is almost as high as the company has been at any time for the past 10 years. While the company could continue to grow at current EPS expectations and deliver upside on a forward 16-18X P/E of around 8-12%, the flip side on a 15X forward P/E is an annualized 2023E RoR of 3.5%.
That's not what we want.
So what am I saying here? Am I saying that I'm selling Anthem, I'm divesting my holding?
No - I'm not. My cost basis is good, the company is still on a growth trajectory, and I don't see enough catalysts for a downturn here to consider a mid-sized valuation premium to be cause enough for rotation. I would rotate my position if we're looking at above 19.5X-20X P/E, because that's above where I believe a healthcare insurer like Anthem should be.
However, at current expectations and forecasts, including a slight double-digit EPS growth, and the company's objectives of lowering cost, as well as the dynamics of its investments and ongoing costs, I no longer see the company as a "BUY". There are better alternatives on the market, there are safer ways to make that market-beating, double-digit return.
Anthem would require an above-17.5X forward P/E under current expectations to deliver market-beating returns. Historically speaking, such valuations for Anthem have always been fleeting. It's not that they're unlikely - but I don't view their likelihood as high to last.
In addition, the company dividend yield is abysmal. At less than 1%, it significantly underperforms inflation, and even the 18.5% dividend increase expected in 2021 followed by only 3.8% in 2022 (Source: S&P Global) is likely to change that.
In my forecasts and valuation models of Anthem, I do see the potential for continued growth - but combine historical trends with inflation and margin pressures (EBITDA margin of 7.7% expected in 2020, forecasted to drop to 7% in 2022E due to costs/less income), I don't see the potential for catalysts that would allow such a valuation premium to stand.
Instead, I see the likelihood that cost pressures and compression in income margins are likely to revert this company's valuation to a more historically-correct level over time.
This is not enough to make me rotate my holding, but it's enough to make me focus on other "BUYs" instead.
Current analyst targets for Anthem confirm the somewhat compressed potential upside. Anthem has not had a significant double-digit analyst upside since it crossed over the $400 mark. The current average analyst target for Anthem, based on 23 analysts, is $473/share, coming to a 2% upside. Compare that to almost 16-20% back when I bought, reflecting some of the upsides I myself saw when the company was cheap. (Source: S&P Global).
The fact is, Anthem was undervalued. It no longer is - and you should reconsider your potential "BUY" stance here.
I'm moving to a "HOLD" with a price target, in the high range, of around $400/share, signifying a ~15.5X premium P/E where the company could deliver market-beating returns on a conservative basis.
Above that, I'm not interested.
My thesis on Anthem is now the following:
- A great company with a great upside at a good valuation - but above a certain level, the company's low yield, potential future margin compression, and relatively mature market position make any sort of massive growth and RoR near-impossible in the long term. Therefore, price it as such.
- At current levels, I consider the company fundamentally appealing, but not valued attractively. Investments seem likely to deliver below-market if positive RoR.
- ANTM is a "HOLD" here. A price target that I would consider attractive for investment based on my goals would be around $400/share - though every investor of course needs to look at their own targets, goals, and strategies. I would also always consult with a finance professional before making investment decisions such as this.
Remember, I'm all about:
- Buying undervalued - even if that undervaluation is slight, and not mind-numbingly massive - companies at a discount, allowing them to normalize over time and harvesting capital gains and dividends in the meantime.
- If the company goes well beyond normalization and goes into overvaluation, I harvest gains and rotate my position into other undervalued stocks, repeating #1.
- If the company doesn't go into overvaluation, but hovers within a fair value, or goes back down to undervaluation, I buy more as time allows.
- I reinvest proceeds from dividends, savings from work, or other cash inflows as specified in #1.
This process has allowed me to triple my net worth in less than 7 years - and that is all I intend to continue doing (even if I don't expect the same rates of return for the next few years).
If you're interested in significantly higher returns, then I'm probably not for you. If you're interested in 10% yields, I'm not for you either.
If you however want to grow your money conservatively, safely, and harvest well-covered dividends while doing so, and your timeframe is 5-30 years, then I might be for you.
Anthem is a "HOLD" here.
Thank you for reading.
The company discussed in this article is only one potential investment in the sector. Members of iREIT on Alpha get access to investment ideas with upsides that I view as significantly higher/better than this one. Consider subscribing and learning more here.
This article was written by
Mid-thirties DGI investor/senior analyst in private portfolio management/wealth management for a select number of clients. Invests in USA, Canada, Germany, Scandinavia, France, UK, BeNeLux. My aim is to only buy undervalued/fairly valued stocks and to be an authority on value investments as well as related topics.
I am a contributor for iREIT on Alpha as well as Dividend Kings here on Seeking Alpha and work as a Senior Research Analyst for Wide Moat Research LLC.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of ANTM either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
While this article may sound like financial advice, please observe that the author is not a CFA or in any way licensed to give financial advice. It may be structured as such, but it is not financial advice. Investors are required and expected to do their own due diligence and research prior to any investment. Short-term trading, options trading/investment, and futures trading are potentially extremely risky investment styles. They generally are not appropriate for someone with limited capital, limited investment experience, or a lack of understanding for the necessary risk tolerance involved. The author's intent is never to give personalized financial advice, and publications are to be viewed as research and company interest pieces. The author owns the European/Scandinavian tickers (not the ADRs) of all European/Scandinavian companies listed in the articles. The author owns the Canadian tickers of all Canadian stocks written about.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.