On Wednesday, Baird reaffirmed its confidence in Elevance Health Inc. (NYSE: ELV) shares, maintaining both an Outperform rating and a $625.00 price target on the company’s stock. The endorsement comes in the wake of UnitedHealth Group (NYSE:UNH)'s third-quarter earnings, which revealed a miss on medical loss ratio (MLR) by approximately 80 basis points.
The analyst at Baird assessed potential implications for Elevance's third-quarter earnings, which are to be reported on October 17. By examining four different scenarios, Baird's base case suggests that Elevance might face a similar MLR miss of about 100 basis points. This miss could lead to an approximate 3-4% headwind on the adjusted earnings per share (EPS) for the year 2024. There is also a possibility of a 6-8% EPS headwind if the trend continues into the second half of the year.
Despite the potential for near-term earnings pressure, Baird's stance on Elevance remains bullish. The firm emphasizes the long-term potential, citing the stock's current trading value at roughly 11 times its projected 2025 earnings per share, compared to the S&P 500 average of approximately 21 times. This valuation suggests that the current headwinds may be transient and that the long-term risk/reward ratio for Elevance is exceedingly positive.
The analyst's commentary highlights the comparison between Elevance and broader market valuations, pointing out the opportunity for investors considering the company's lower price-to-earnings ratio relative to the S&P 500. This perspective suggests that Elevance's stock may be undervalued, offering a potentially attractive entry point for long-term investment.
Elevance's upcoming earnings report will provide further insight into the company's financial health and its ability to manage MLR pressures. Investors and market watchers will be looking closely at the third-quarter results to gauge the accuracy of Baird's projections and the resilience of Elevance's business model in the face of industry challenges.
In other recent news, Elevance Health Inc. reported a 12% year-over-year increase in its second-quarter adjusted diluted earnings per share (EPS), hitting $10.12. The healthcare company also reaffirmed its annual guidance, projecting a minimum adjusted diluted EPS of $37.20, which would denote a 12% growth from the previous year.
This performance is credited to robust membership growth in the individual Affordable Care Act (ACA) business and high retention in national accounts. Elevance Health also highlighted new Medicaid business wins, setting the stage for future growth.
The company has set its sights on a 6.5% to 7% operating margin target by 2027 and anticipates growth in annual operating earnings in the upper single-digit to low double-digit percent range over time. Elevance Health also expects to see accelerating revenue growth across all business lines by 2025.
Despite some challenges, including a short-term disconnect between rate timing and emerging acuity in Medicaid populations, the company remains focused on its long-term growth strategy. This includes the expansion of its Carelon Services and CarelonRx businesses and the integration of recent acquisitions like Paragon Healthcare and BioPlus Specialty Pharmacy. These are among the recent developments for Elevance Health.
InvestingPro Insights
To complement Baird's analysis, InvestingPro data offers additional context for Elevance Health's financial position. The company's P/E ratio of 16.93 and adjusted P/E ratio of 15.19 for the last twelve months as of Q2 2024 align with Baird's observation of Elevance trading at a lower multiple compared to the S&P 500. This supports the notion that the stock may be undervalued relative to the broader market.
InvestingPro Tips highlight that Elevance Health has raised its dividend for 13 consecutive years and has maintained dividend payments for 14 consecutive years. This consistent dividend growth, coupled with a current dividend yield of 1.35%, underscores the company's commitment to shareholder returns despite potential near-term earnings pressures.
Furthermore, an InvestingPro Tip indicates that management has been aggressively buying back shares, which could be seen as a vote of confidence in the company's long-term prospects. This aligns with Baird's bullish stance on Elevance's future potential.
For investors seeking a deeper understanding of Elevance Health's financial health and market position, InvestingPro offers 13 additional tips, providing a comprehensive view of the company's strengths and potential risks.
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