Our Anthem Stock Prediction in 2019 (Buy or Sell?)
Americans spend $9,523 per person a year on medical expenses, by far the most among developed countries. Annual spending in the U.S. on health services now exceeds $3 trillion a year. Those eye-opening statistics come courtesy of the private, nonpartisan research group the Commonwealth Fund.
Think of this spending as the medical-industrial complex, just as formidable as the partnership between the Pentagon and defense contractors that produces planes, tanks and bombs.
One of the surest ways to get rich is to tap into an inexorable trend that’s largely immune to economic cycles. That’s why we’re bullish on the health services sector and why, in this article, we’re spotlighting Anthem (NYSE: ANTM).
With a market cap of $70.2 billion, Anthem is an influential health sector player with a well-diversified business base that includes government, individual, Medicare and Medicaid policies.
Is Anthem poised to reap a robust share of the health care spoils in 2019? Or does government and political uncertainty pose too many headwinds?
Our ANTM stock prediction will examine the pros and cons of this company, and we’ll see what 2019 has in store for it.
What Is Anthem?
Anthem is a leading U.S. health insurer that offers Blue Cross/Blue Shield plans in 14 states. Anthem currently serves 40.2 million medical members through its affiliated health plans.
Anthem has a huge selection of network-based managed care health benefit plans. It offers these to just about everyone—individuals, groups, and Medicaid and Medicare users.
Most of the company’s managed care plans offer Preferred Provider Organization (PPO) and Health Maintenance Organization (HMO) options, as well as point-of-service plans, hybrid offerings such as consumer-driven health plans, and even just hospital-only plans.
Anthem handles support and infrastructure, including claims processing, disease management, actuarial services, stop loss insurance, provider network access, underwriting medical cost management, wellness programs, and other administrative services.
For those who need more specialized products, Anthem has those, too. They include dental, vision, life and disability insurance benefits, analytics-driven personal health care guidance, and Medicare administrative services.
Anthem operates via three divisions: Commercial & Specialty Business, Government Business, and Other.
How Has Anthem Stock Performed?
- Over the past year, ANTM shares have gained 6% whereas the S&P 500 has lost 7%.
- Over the past two years, ANTM shares have gained 72% whereas the S&P 500 has gained 15%.
- Over the past five years, ANTM shares have gained 208% and the S&P 500 has gained 48%.
How Has Anthem Stock Performed in 2017/2018?
- In 2017, Anthem shares gained 57% whereas the S&P 500 gained 19%.
- In 2018, Anthem shares gained 6% whereas the S&P 500 lost 7%.
Who Are Anthem’s Rivals?
UnitedHealth Group (NYSE: UNH)
With a market cap of $257.4 billion, UnitedHealth is the largest health insurance company in the U.S.
The UnitedHealthcare division provides consumer health plans for private and public employers of all sizes. It offers specialized coverage for seniors, including preventive and acute health care services and for chronic disease. The division also administers Medicaid plans and the federal Children’s Health Insurance Program.
The OptumHealth division is where you find networks of specialists, health management services, consumer engagement, and financial services.
The OptumInsight division is the tech and IT side, which provides software and information products, consulting, and outsourcing contracts to hospitals, life sciences companies, physicians, health plans, governments, and other organizations. The OptumRx division provides pharmacy care services
Humana (NYSE: HUM)
Humana (market cap: $41 billion) operates through four divisions. The Retail division provides Medicare and supplemental benefit plans to individuals or through group accounts, and administers the federal Limited Income Newly Eligible Transition prescription drug plan program.
The Group and Specialty segment provides commercial medical and specialty health insurance benefits, along with financial protection products and administrative services.
The Healthcare Services division offers pharmacy solutions. The Individual Commercial division offers individual commercial medical health insurance benefits.
Centene (NYSE: CNC)
Centene (market cap: $26 billion) is a specialized company that focuses on under-insured and uninsured individuals.
Centene operates via two divisions. The Managed Care division offers health plan coverage to individuals but only through government subsidized programs, such as Medicaid. These plans include primary and specialty physician care, inpatient and outpatient hospital care, emergency and urgent care, prenatal care, and all the other services Obamacare demands.
The Specialty Services division provides Centene’s pharmacy benefit management (PBM) services. It also handles wellness and disease management services, correctional health care services, and home based primary care services. This division provides services to correctional facilities, and military service members and their families.
Will Anthem Stock Go Up in 2019 (Should You Buy?)
Certain trends will continue, no matter who is sitting behind the desk in the Oval Office. One of them is the aging of the U.S. population, as Baby Boomers approach retirement age. Another is the remarkable pace of technological innovation in medical care.
Total U.S. health spending (both public and private) is projected to rise to one-fifth of the U.S economy by 2025. Those are powerful tailwinds for Anthem and its peers.
Here’s a video that pinpoints promising health care stocks for 2019:
The push for medical cost containment has been fueling consolidation in the health sector. Under the laissez-faire Trump regime, health care giants will have more freedom to join forces and foster economies of scale. Now that Obamacare has survived Republican attempts to kill it, health insurers such as Anthem can look forward to a steady influx of new patients.
It’s not just health insurers, either. Pharmaceutical firms are enjoying strong revenue and earnings growth, as demand for drugs grows.
Anthem hasn’t been standing still. In October 2017, Anthem announced that it would not renew its PBM relationship with Express Scripts (NSDQ: ESRX), arguing that Express had overcharged it $3 billion. Anthem plans to handle the PBM process through its internal IngenioRx unit. The Express Scripts contract expires in 2019 and Anthem said it would enter a five-year contract with CVS Health (NYSE: CVS).
Is any of this reflected in the company’s valuation? Let’s take a look.
ANTM has a $59 billion net-of-net-cash market cap. Trailing 12-month (TTM) net income was $5.2 billion (after adjusting for a higher tax bill due to recent changes in the tax code). Thus, ANTM stock is trading at about 11.5x trailing earnings.
Analysts project five-year annualized earnings of 18%. As mentioned in earlier columns, we give a 10% premium to that number for each of the following: world-class brand name (yes), significant cash hoard (yes), and/or robust free cash flow (no).
So that adds 3.6 to analyst estimates, bringing us to 21.6%. ANTM trades at 11.5x, which gives it a price-to-earnings-growth (PEG) ratio of 0.55. Anything under 1.0 is a value. ANTM seems very cheap to us.
Will Anthem Stock Go Down in 2019 (Should You Sell?)
Anthem appears to be a bargain based on our traditional PEG ratio valuation method. However, we always like to get a reality check. How is the stock valued in relation to its peers? Sometimes, this comparison reveals even better value plays out there.
UNH has a net of cash market cap of $243 billion. On $12 billion of TTM net income, it trades at 20x earnings.
The checklist: world-class brand name (yes), significant cash hoard (yes), and/or robust free cash flow (yes).
Including the valuation bonus, UNH’s five-year estimate is for 20% growth. It thus trades at a PEG ratio of exactly 1.0. Normally, 1.0 is the highest we go to consider buying a stock. However, if its growth rate exceeds 15%, we permit 2.0.
On that basis, UNH is a growth stock trading at a reasonable valuation and ANTM seems about the same.
HUM has a net of cash market cap of $30 billion. On $1.5 billion of TTM net income, it trades at 20x earnings. The checklist: world-class brand name (yes), significant cash hoard (no), and/or robust free cash flow (no).
Including the valuation bonus, HUM’s five-year estimate is for 17.8% growth. It thus trades at a PEG ratio of 1.12. Normally, 1.0 is the highest we go to consider buying a stock. However, if its growth rate exceeds 15%, we permit 2.0.
On that basis, HUM is a growth stock trading at a reasonable valuation that’s only slightly pricier than UNH.
CNC has a net of cash market cap of $18.6 billion. On $900 million of TTM net income, it trades at 20x earnings. The checklist: world-class brand name (no), significant cash hoard (no), and/or robust free cash flow (no).
CNC’s five-year estimate is for 20% growth, which means that it trades at a PEG ratio of exactly 1.0. Normally, 1.0 is the highest we go to consider buying a stock. However, if its growth rate exceeds 15%, we permit 2.0. And here we are, with another valuation winner.
Overall Anthem Forecast and Prediction for 2019
What’s our final verdict on ANTM for 2019?
This year is setting the table for further growth in the health care sector. We don’t expect any major regulatory or legislative changes coming down the pike that would upset the profitability of health insurers such as Anthem.
Meanwhile, the aging of the population has spawned ever-greater health care spending and an obsession with fitness.
With the Democrats in control of the House of Representatives, we certainly won’t see cuts to Medicare and Medicaid, nor any cutbacks to Obamacare. The products and services of Anthem will enjoy greater coverage under Obamacare, providing a multi-year boost to the company’s revenue and earnings.
The average analyst expectation is that Anthem will rack up five-year earnings growth of 17.8%, on an annualized basis. This growth should remain on track, regardless of the economic cycle.
Anthem stock has more room to run in 2019 and beyond.