Anthem (ANTM) Grows on Membership, Rising Expenses Hurt

Anthem Inc ANTM is well poised for long-term growth on the back of its membership base that has strengthened due to strategic acquisitions, growing national accounts in the commercial segment and the Medicaid expansion in the government segment. Apart from this, Anthem’s revenues have also been driven by net investment income that started increasing since 2016 due to the interest rate hikes.

Anthem’s capital management, backed by solid cash position, also impresses.  The company has been witnessing a consistent rise in its cash flow from operations. This has enabled Anthem to continuously enhance shareholders’ value through several capital deployment initiatives like share repurchases, dividend payouts, etc. In a year’s time, its shares have gained 61%, outperforming the industry’s rally of 40%.

The company maintains a consistent record of earnings outperformance. In each of the last four quarters, Anthem’s bottom line surpassed expectations with an average beat of 11.5%. Following strong third-quarter 2017 results, the company raised its earnings and revenue guidance for 2017 for the second time this year. This upbeat guidance boosts shareholders' confidence in the stock.

However, Anthem has been incurring mounting loss in its public exchange business that has been weighing on the company’s bottom line and top line. It has been witnessing significant decline in enrollment in this business since 2016. Along with other health insurers like Humana Inc HUM, Aetna Inc AET and UnitedHealth Group, Inc UNH, Anthem is planning to scale back its participation on this loss-making business in 2018. Although curtailment of this business is likely to save the company from losses, it will lead to a fall in revenues.

Moreover, the company’s rising level of debt not only increases financial risks but also raises interest expenses, which weighs on margins.

Anthem has also been suffering from higher expenses over past few years, primarily caused by increasing benefit expenses along with selling, general and administrative expenses. This continues to hurt the company’s profitability.

Zacks Rank

Anthem presently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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