Carelon Expansion And AI Investments Will Broaden Services And Improve Customer Satisfaction

Key Takeaways

• Strategic Medicaid rate alignment and ACA market expansion could drive revenue growth as higher rates and expanded market share stabilize.
  
• AI investments and operational efficiencies aim to reduce costs and enhance margins through improved care management and customer satisfaction.
  
• Elevated medical costs, regulatory challenges, and market competition pose risks to Elevance Health's profit margins and earnings growth in Medicaid and Medicare sectors.

Catalysts

Operates as a health benefits company in the United States.

• Elevance Health is actively working with states to align Medicaid rates with member acuity, which is expected to improve revenue as these higher rates are implemented in the future.
  
• The company plans to enhance operational efficiencies and manage the cost of care through proactive actions, focusing on long-term operating efficiency, which could increase net margins.
  
• Elevance Health's strategic expansion into Individual Exchange markets by offering ACA plans in additional states is likely to drive revenue growth as the enrollment stabilizes and market share increases.
  
• The expansion of Carelon, including acquisitions such as Kroger Specialty Pharmacy and CareBridge, is expected to broaden service offerings and increase revenue and earnings from specialty care and home health businesses.
  
• Investments in AI-driven solutions are anticipated to reduce costs and improve customer satisfaction, eventually contributing to higher net margins through operational improvements.

Elevance Health Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Elevance Health's revenue will grow by 7.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.7% today to 4.5% in 3 years time.
• Analysts expect earnings to reach $9.7 billion (and earnings per share of $44.78) by about December 2027, up from $6.4 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $7.6 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.4x on those 2027 earnings, up from 13.2x today. This future PE is lower than the current PE for the US Healthcare industry at 21.9x.
• Analysts expect the number of shares outstanding to decline by 2.37% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.92%, as per the Simply Wall St company report.

Elevance Health Future Earnings Per Share Growth

Risks

• Elevated medical costs in the Medicaid business are creating headwinds, impacting Elevance Health's adjusted diluted earnings per share and benefit expense ratio, potentially affecting net margins.
  
• There is a mismatch between Medicaid rates and member acuity, with states often using outdated data to set rates, leading to inadequate rate increases and affecting the company's earnings visibility and profit margins.
  
• Unexpected accelerated cost trends and unfavorable prior period development, particularly affecting Medicaid, are challenging the company's ability to maintain desired profit margins and earnings growth.
  
• Regulatory and market pressures in Medicare Advantage, including rate cuts by CMS and reductions in star ratings, could challenge future earnings and market positioning.
  
• Competition in the Individual Exchange business, and expansion into new markets, though a growth opportunity, presents execution risks that could impact revenue sustainability and profit margins.

Valuation

• The analysts have a consensus price target of $508.08 for Elevance Health based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $625.0, and the most bearish reporting a price target of just $388.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $217.1 billion, earnings will come to $9.7 billion, and it would be trading on a PE ratio of 13.4x, assuming you use a discount rate of 5.9%.
• Given the current share price of $366.3, the analyst's price target of $508.08 is 27.9% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.