Dj Humana Inc. Stock Outperforms Competitors On Strong Trading Day

Elevance Health, Inc.’s ELV shares have lost 20% in the past three months compared with the industry’s 7.1% decline. It has also lagged the broader Zacks Medical sector’s 3.7% decline and the S&P 500’s 10.4% rise in the said time frame. It has a market cap of $95.8 billion.

Closing at $425.39 in the last trading session, the stock of the health benefit company stands 25% below its 52-week high of $567.26.

What’s Weighing on Elevance Health’s Performance?

Elevance Health has been grappling with a decline in medical membership due to member attrition in the Medicaid business, due to eligibility redeterminations and adjustments in Medicaid coverage areas across certain states. As of Sept. 30, 2024, overall membership declined 3% year over year. A decline in membership can dampen ELV’s premium growth, which accounts for a major portion of its top line. Renowned health insurers like Humana Inc. HUM and Molina Healthcare, Inc. MOH also have exposure to the Medicaid business line.

Elevance Health struggles with mounting expenses due to higher benefit costs and cost of products sold. An elevated expense level puts pressure on margins. For the first nine months of 2024, total expenses increased 1.9% year over year. Benefit expense inched up 1.2% year over year in the same time frame, while the cost of products sold escalated 10.3% year over year. ELV projects its benefit expense ratio for 2024 to be around 88.5%, which indicates a deterioration of 150 bps from the 2023 figure.

A debt-laden balance sheet induces an increase in interest expenses for Elevance Health, which could take a toll on financial flexibility over time. As of Sept. 30, the company's long-term debt (excluding the current portion) was $24.7 billion, up 6.2% from the figure as of Dec. 31, 2023. In the first nine months of 2024, interest expenses increased 9.6% year over year.

Concerns regarding financial flexibility also arise due to Elevance Health’s declining cash generation. In the first nine months of 2024, net cash from operations dropped 53.8% from the prior-year period, following a 4% fall in 2023. Continuation of this situation can hamper the company’s ability to undertake substantial investments to enhance digital capabilities and platforms, which seems to be of dire need amid a booming digital era.

ELV’s Revised Projections

Elevance Health has adjusted its projections for 2024, lowering its expected adjusted net income to a minimum of around $33.00 from the previous outlook of a minimum of $37.20. The revised guidance indicates a decline of 0.4% from the 2023 figure.

During the past 30 days, ELV’s 2024 and 2025 earnings estimates have witnessed major downward revisions, thereby raising concerns among investors. The estimates declined 10.3% and 14.4%, respectively, in the same time frame. It beat earnings estimates thrice in the last four quarters and missed on one occasion, with the average negative surprise being 2.55%.

How Can ELV Power Through the Challenges?

Elevance Health is likely to experience benefits from its strategic initiatives, including expansion plans in the Individual state or federally-facilitated marketplaces in 2025. Buyouts will likely enhance the capabilities of the company. The Carelon unit benefits on the back of improved risk-based capabilities in Carelon Services and higher CarelonRx product revenues. Meanwhile, an aging population is expected to sustain the solid demand for its Medicare plans in the days ahead.

Elevance Health’s Valuation

ELV is trading at a discount compared with the industry average. It is currently trading at a forward 12-month price-to-earnings ratio of 12.03X, lower than the industry average of 14.66X.

Conclusion

Though the stock seems undervalued at the moment, challenges such as unanticipated headwinds encountered in the Medicaid business, rising costs, high leverage, declining operating cash flows and downward earnings estimate revisions continue to persist for Elevance Health. Therefore, current investors might consider booking profits now.

ELV currently has a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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