Anthem (ANTM), the unsung, perennial No. 2 managed-care player based on number of U.S. medical members, is changing its tune — along with its name. And it's showing in Anthem stock.
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This insurer, which took over the No. 1 slot in 2021, recently unveiled its new moniker, Elevance Health. The change, pending shareholder approval, is meant to convey a broader role beyond insurance to elevating well-being.
But Anthem won't be changing its valuable consumer brand.The operator of Blue Cross Blue Shield plans in 14 states has long enjoyed enviable market clout.
Yet it has frequently produced uninspiring results and lagging stock performance.So how is it that Anthem stock has landed on the IBD Leaderboard portfolio of elite stocks?
Part of the story is economic. Anthem stock historically outperforms in periods of rising inflation and interest rates, Stephens analyst Scott Fidel told Investor's Business Daily.
As rates rise, so does Anthem's investment income. Its significant pricing power "supports margins against the backdrop of rising inflation," Fidel said. Further, Anthem is pretty well hedged against economic weakness. Though rising layoffs could hurt commercial insurance membership, Medicaid would see a bump.
Anthem Stock: CEO Change
The other part of the story behind Anthem's current strength really began when the company tapped the former boss of its top rival as chief executive in November 2017, Fidel said.Now CEO Gail Boudreaux has the distinction of leading the No. 1 U.S. insurer at two different firms.
Last year, Anthem's domestic medical membership overtook Boudreaux's old employer, UnitedHealthcare, the managed-care arm of Dow Jones giant UnitedHealth Group (UNH). UnitedHealth still has more members globally.
Anthem's "execution on their core health insurance business has really improved and accelerated over the last three to four years," Fidel said.
After five years of about 5% annual revenue growth, the 2019-2022 period is on pace to deliver nearly 14% growth, he said.
Growth has stepped up for most managed-care companies amid "tailwinds from Medicare and Medicaid," Fidel said. Yet "Anthem has been able to pivot from being a relative underperformer to an outperformer."
Anthem stock has a 95 IBD Composite Rating, based on technical and fundamental factors. That places Anthem stock No. 2 in IBD's Medical-Managed Care group.
Medicare And Medicaid Drive Growth
In 2021, Anthem added just under 2.5 million new members, led by growth of its government business. Medicaid membership rose 1.75 million and Medicare Advantage 430,000. With UnitedHealth adding 2.1 million members in the U.S., Anthem nosed past its rival, 45.4 million to 45.1 million.
Last year, organic growth accounted for about three-fourths of Anthem's membership gains. But in June, Anthem also completed its acquisition of MMM Holdings, which operates the most popular Medicare Advantage plan in Puerto Rico.
Anthem's momentum carried into 2022. On the Jan. 26 fourth-quarter earnings call, Chief Financial Officer John Gallina touted a "record selling season for national accounts," meaning large employer coverage.
After a strong enrollment period, Anthem projects double-digit organic growth in Medicare Advantage membership. That's ahead of 8%-9% growth industrywide, says analyst Fidel.
Under a contract won last spring, Anthem will begin serving Ohio's Medicaid population in July. Also, it is acquiring the expiring contract of Paramount Advantage — and care for the 265,000 Ohio Medicaid members it serves.
Anthem Stock And Strategic Mergers
In another 2021 deal, Anthem acquired MyNexus, which manages in-home care for about 2 million Medicare Advantage customers with the aim of reducing emergency room visits and hospital admissions.
"During 2021, our investments in enhancing the customer experience, delivering innovative, customized whole health solutions, and deepening digital engagement helped to deliver strong growth across our health benefits businesses," Boudreaux said on the call.
Fidel credits Boudreaux for shifting how Anthem deploys its earnings. With the exception of one massive deal — the $54 billion purchase of Cigna that was blocked on antitrust grounds in 2017 — capital deployment was "extremely weighted to just share buybacks."
Now there's "much more balance" with strategic M&A and other investments in its business supporting topline growth, Fidel said. Meanwhile, Anthem has raised its long-term earnings growth target to 12%-15%. The prior range was high single-digits to low double-digits, he says.
Anthem stock analyst Julie Utterback from Morningstar says the better trajectory for operating earnings under Boudreaux has come with a shift in management's incentive structure. Now bonuses are tied to "operating profit rather than an (earnings) target that can be financially engineered," she said.
Anthem's Market Muscle
Further, Anthem has an average 35% share in markets where it is the exclusive Blue Cross Blue Shield licensee, Utterback says.
"This sort of local scale advantage allows for much greater negotiating leverage" vs. health services providers, she wrote. As a result, Anthem can "offer lower priced products or more benefits per member to existing and potential clients than its peers."
Such benefit add-ons are among the draws boosting Medicare Advantage membership. Further, Anthem's Everyday Extras package lets members choose among services like transportation, personal home health and prepared meal delivery.
A big part of Anthem stock's recent momentum comes from bringing prescription benefit management in house. Anthem launched IngenioRx after a 10-year deal with Cigna's Express Scripts ended in 2019.
IngenioRx should allow Anthem to "provide a more holistic view of a patient's health," Utterback wrote. That "could lead to better cost controls and management of health conditions."
Bigger Slice Of Profits
It's already boosting profitability. Last year, Anthem's IngenioRx business "accounted for about 22% of the company's total operating profit," Utterback told IBD.
By comparison, UnitedHealth's Optum health services division now accounts for just over 50% of company earnings. The higher-margin Optum businesses include prescription benefit management, information technology services, primary and urgent care, and outpatient surgery.
Anthem got a late start in building out its capabilities, relative to UnitedHealth's integrated care model. Yet Anthem's uncommon local market power helps make up for it.
Because "the network effect is so strong at Anthem," the company has made bigger inroads than the average insurer in getting providers to embrace value-based care, Utterback said.
Under value-based contracts, providers can get paid more for delivering better health outcomes at a lower cost, but risk lower profits if costs escalate. That aligns the incentives of providers with Anthem toward lowering the cost of care — and preserving or increasing Anthem's cost advantage over rivals.
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