Why Is Anthem (ANTM) Up 5.3% Since The Last Earnings Report?

It has been about a month since the last earnings report for Anthem, Inc. (NYSE:ANTM) . Shares have added about 5.3% in that time frame, outperforming the market.

Will the recent positive trend continue leading up to the stock’s next earnings release, or is it due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Anthem Beats Q4 Earnings and Revenue Estimates

Anthem’s fourth-quarter 2016 adjusted net income per share of $1.76 surpassed the Zacks Consensus Estimate of $1.59 by 10.7%. The bottom line also surged 54.4% year over year. Adjusted net income was $11.00 per share for full-year 2016, up 8.3% year over year.

Operating revenues of $21.5 billion beat the Zacks Consensus Estimate of $20.9 billion. It also grew 7.3% year over year due to a 7.4% increase in premium revenues and 31% rise in net investment income. For 2016, the metric amounted $84.2 billion, up 7.4% year over year.

Medical enrollment was approximately 39.9 million as of Dec 31, 2016, reflecting a 3.4% year-over-year increase.

Total expense increased nearly 6.3% year over year to $21 billion in the reported quarter, mainly due to a 7.7% rise in benefit expenses from the prior-year quarter.

Anthem’s benefit expense ratio was 87.2% in the reported quarter, up 20 basis points (bps) year over year. The deterioration was mainly due to higher medical cost experience in the Medicaid business.

The SG&A expense ratio was 15.2% in the fourth quarter, down 110 bps from the prior-year quarter. The improvement was primarily driven by lower administrative costs due to expense efficiency initiatives as well as higher operating revenues.

Segment Results

Commercial & Specialty Business

In the fourth quarter, operating revenues totaled at $9.6 billion. This reflects year-over-year growth of 2.4%. Operating gain soared 239.1% year over year to $189.2 million. Operating margin improved 140 bps to 2%.

The outstanding performance was driven by lower administrative costs due to expense efficiency initiatives undertaken by Anthem, the timing of lower medical cost experience in the Local Group business and self-funded membership growth.

Government Business

At the end of the fourth quarter, operating revenues totaled $11.8 billion, up 11.6% year over year. Operating gain increased 26.8% year over year to $530 million. Operating margin improved 60 bps to 4.5%.

The upside reflected the impact of lower administrative costs due to expense efficiency initiatives taken by the company, the retroactive change in the minimum MLR calculation under California's Medicaid expansion program and lower medical cost experience in the Medicare business.

Other

Anthem incurred an operating loss of $66.1 million in this segment in the fourth quarter. This is substantially wider than an operating loss of $33.8 million in the prior-year quarter. Expenses related to the Cigna (NYSE:CI) acquisition primarily resulted in the wider loss.

Financial Update

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As of Dec 31 2016, Anthem had cash and cash equivalents of $4 billion, up 93% from year-end 2015.

As of Dec 31, 2016, long-term debt of Anthem decreased 6.3% to $14.3 billion from $15.3 billion in year-end 2015.

As of Dec 31, 2016, shareholder equity was $25 billion, up 8.6% from year-end 2015.

Operating cash flow was $275 million in the fourth quarter and approximately $3.2 billion in 2016.

Share Repurchase and Dividend Update

Anthem did not repurchase any shares during the fourth quarter due to the pending acquisition of Cigna. As of Dec 31, 2016, the company had nearly $4.2 billion of board-approved share repurchase authorization remaining.

In the reported quarter, Anthem paid a quarterly dividend of 65 cents per share. This amounts to a total cash distribution of $171.3 million.

Guidance for 2017

Anthem expects adjusted net income to be greater than $11.50.

Medical membership is expected in the range of 40.1– 40.3 million. Expected range for fFully insured membership and self-funded membership are 15.1–15.2 million and 25–25.1 million, respectively.

Operating revenues are projected in the range of$86.5–$87.5 billion.

Benefit expense ratio and SG&A ratio are expected to be around 87% and 13.3%, respectively, with adjustment of 30 bps.

Anthem expects operating cash flow in excess of $3.5 billion.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed an upward trend in fresh estimates. There have been two upward revisions for the current quarter.

VGM Scores

At this time, Anthem's stock has an average Growth Score of 'C', though it is lagging a bit on the momentum front with a 'D'. However, the stock was allocated a grade of 'A' on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of 'B'. If you aren't focused on one strategy, this score is the one you should be interested in.

Based on our scores, the stock is more suitable for value investors than growth investors.

Outlook

The stock has a Zacks Rank #2 (Buy). We are expecting an above average return from the stock in the next few months.

Zacks Investment Research

Written By: Zacks Investment Research