2 Healthcare Titans Tanked After Earnings – Should You Invest Now?

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Elevance Health (ELV), one of the largest health insurers in the U.S., recently reported its Q3 2024 earnings. Despite solid revenue growth, the stock plummeted nearly 14%, creating a buying opportunity that has sparked debate among investors. In this post, we’ll explore who Elevance Health is, why the stock dropped, and whether the long-term outlook makes this dip a chance to buy at a discount. We’ll also compare Elevance Health with UnitedHealth Group (UNH), another healthcare giant, to determine if their situations are similar.

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Who is Elevance Health (ELV)?

Elevance Health, formerly known as Anthem, is one of the largest healthcare providers in the U.S., offering a wide range of health insurance products, including Medicaid, Medicare, and commercial plans. With over 47 million members and an extensive network of healthcare services, Elevance Health plays a significant role in shaping healthcare delivery across the country.

In Q3 2024, Elevance reported $44.7 billion in revenue, an impressive 5.3% year-over-year increase, beating Wall Street’s expectations of $43.33 billion. This performance underscores its dominance in the healthcare industry, driven by the demand for healthcare services across its government and commercial plans.

Despite the positive revenue figures, the company is dealing with two major challenges: rising medical costs and shrinking Medicaid enrollments. This is largely due to the rollback of pandemic-related Medicaid expansions, which had temporarily boosted enrollment numbers but are now weighing on the company's top line as those enrollments unwind.

In addition, Elevance Health's Operating Income stood at $2.82 billion for Q3, up from $2.8 billion the previous year, showcasing its ability to manage its operational efficiency despite cost pressures. However, these numbers weren’t enough to offset investor concerns regarding profit margins and future earnings outlook.

Another attractive features of Elevance is its consistent dividend payout, which appeals to income-focused investors. The company currently offers a dividend yield of around 1.4%, reflecting its commitment to returning value to shareholders. In Q3 2024, ELV declared a quarterly dividend of $1.48 per share, representing an 11.3% increase year-over-year.

With its payout ratio hovering around 20%, Elevance maintains a conservative approach to dividends, allowing it to reinvest a significant portion of its earnings back into the business. This low payout ratio also indicates that the company has plenty of room to increase dividends in the future as its cash flow continues to grow. Even amid rising medical costs and pressures from shrinking Medicaid enrollments, ELV’s steady dividend policy remains a key reason for long-term investors to consider the stock.

Why Did ELV’s Stock Drop After Earnings?

The sharp 14% decline in Elevance Health’s stock price was driven by a combination of factors. One of the key metrics that investors focused on was the company’s benefit expense ratio, which surged to 88.3% from 86.4% in the previous quarter. The benefit expense ratio measures how much of the premiums collected are paid out in claims, and the rising ratio is a red flag indicating that more is being spent on medical costs than anticipated.

Elevance Health’s Q3 performance was particularly impacted by the shrinking Medicaid membership due to pandemic-related policy rollbacks. The loss of Medicaid enrollments and rising medical costs translated to lower-than-expected earnings for the quarter, and in response, the company was forced to adjust its full-year earnings guidance downward. Originally, Elevance expected adjusted earnings per share (EPS) of $32.85, but has since revised this to between $32.40 and $32.60.​ The stock price drop was further accelerated by general market sentiment, where investors remain skittish about rising healthcare costs and their impact on insurance profitability.

Looking Beyond the Near-Term Issues

While the near-term pressures surrounding medical costs and shrinking Medicaid enrollments have led to significant stock volatility, there are still several reasons to remain optimistic about Elevance Health’s long-term outlook. For one, the company continues to grow its revenue base, and despite the challenges, it maintains a strong operational position in both the government and commercial insurance markets.

Elevance Health also has a relatively low forward P/E ratio of about 11, which is lower than many of its industry peers, including UnitedHealth Group (UNH), making it an attractive value play for long-term investors. With many analysts projecting a price target of $578.50 for the stock, Elevance Health’s current price drop may be seen as an opportunity to buy at a discount​.

Comparing Elevance Health (ELV) and UnitedHealth Group (UNH)

Much like Elevance Health, UnitedHealth Group (UNH), the largest health insurer in the U.S., also faced challenges after its Q3 earnings release. However, while ELV’s difficulties are more related to Medicaid, UNH’s primary issues stem from Medicare Advantage.

UnitedHealth saw its stock decline following its earnings report, with concerns over rising medical costs and lower margins in its Medicare segment. Despite these challenges, UNH remains a juggernaut in the healthcare space with consistent revenue growth. It reported Q3 revenues of $97.2 billion, up 13.2% year-over-year, making it nearly double the size of Elevance Health in terms of revenue​.

However, UNH’s stock has been more resilient than ELV’s, in part due to its massive scale and market share in both government and commercial plans. While both companies face similar industry-wide cost pressures, UNH’s more diversified portfolio and larger member base provide a slight edge over Elevance Health. Nevertheless, both stocks present compelling opportunities for long-term investors, particularly those looking to take advantage of the healthcare sector’s future growth.

Final Thought: Long-Term Play or Short-Term Pain?

Despite the recent earnings-related setbacks, Elevance Health remains a well-diversified, large-scale player in the healthcare insurance market. Its current valuation and relatively low P/E ratio make it a compelling choice for value-oriented investors willing to weather the short-term volatility associated with rising medical costs and Medicaid rollbacks.

Both Elevance Health and UnitedHealth Group are facing similar pressures, but the broader outlook for the healthcare sector is strong. Investors looking for long-term growth may find these price dips an attractive entry point into two of the largest and most resilient healthcare stocks in the market.

Disclaimer: This article is intended for informational purposes only and should not be construed as financial advice. Always conduct your own due diligence and consult with a financial advisor before making any investment decisions. The opinions expressed here are based on the analysis of available data and may not reflect the most current market conditions.

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