Elevance Health (NYSE: ELV) experienced a significant downturn in its stock following an earnings report that fell short of market expectations. The company's share price dropped by approximately 20% on Thursday, October 17, 2024, closing at 13.68% lower than the previous day at $429. This marked the largest intraday decline since March 2020.
The downward trend continued into Friday, October 18, 2024, with shares decreasing an additional 2.5% to $433.38. The primary catalyst for this decline was an earnings miss attributed to unforeseen challenges in the Medicaid sector, which investors should carefully consider.
Performance and Financial Metrics
Elevance Health reported adjusted earnings per share (EPS) of 8.37, falling short of the consensus estimate of 9.66. The company's net profit for the third quarter stood at 1.01 billion, or 4.36 per share, a decrease from the previous year's figures of 1.3 billion, or 5.45 per share. Despite these challenges, operating revenue increased by 5.3% to 44.72 billion, driven by strong performance in Carelon services and CarelonRx products.
The earnings disappointment was primarily due to challenges within the Medicaid division. Many states have resumed routine verification processes post-COVID-19 pandemic, leading to over 14 million individuals exiting the program since its peak, a decline of about 15%. This contributed to a reduction in medical membership by 1.5 million to approximately 45.8 million members.
Medicaid Challenges and Revenue Impact
Elevance Health's Medicaid division faced "unprecedented challenges" as states resumed routine verification processes, resulting in a significant reduction in Medicaid membership. Although the company secured its largest Medicaid rate increases in a decade, these adjustments were inadequate to match the rising medical expenses, which escalated three to five times faster than anticipated.
The company is currently negotiating with states for higher payments and anticipates that rates will eventually align with the medical costs of its members. However, these ongoing challenges are expected to impact Elevance Health's target margins and overall profitability into 2025.
Revised Financial Outlook
In response to these challenges, Elevance Health revised its expected annual profit to approximately 33 per share, down from the previous estimate of at least 37.20 per share. For 2025, the company expects adjusted earnings to rise more slowly than previously targeted, with a mid-single-digit percentage increase, falling short of the long-term goal of 12% annual growth in adjusted EPS.
Investors should note that Elevance Health's medical-loss ratio reached 89.5%, exceeding Wall Street's predictions due to a "timing mismatch" between Medicaid payments and healthcare requirements. Despite these setbacks, Elevance Health's revenue growth and positive performance in other segments like Carelon services and CarelonRx offer some optimism.
Investor Considerations
Additionally, the company's dependence on government plans remains considerable as noted by Seeking Alpha on October 18, 2024. This calls for cautious optimism from investors as the stock could represent a good value even under conservative growth expectations.
Elevance Health's recent performance reflects broader issues within the health insurance industry, particularly related to government programs like Medicaid. These challenges are not isolated to Elevance Health alone but are part of larger industry headwinds that have been impacting profitability across the board as highlighted by CNBC on October 17, 2024.
Industry Context and Risk Analysis
The company's risk profile indicates a medium risk level with a Sharpe ratio of 0.75 compared to the S&P 500's ratio of 2.29 over the past year. This suggests that while Elevance Health has been underperforming against the benchmark index, its risk-adjusted returns are still relatively stable over the longer term.
Investors should closely monitor ongoing negotiations with states and the company's ability to adapt to changing healthcare costs. While there are challenges ahead, Elevance Health's revenue growth in other areas provides a counterbalance that may appeal to investors looking for long-term value despite the current setbacks.
Conclusion
The recent stock tumble underscores significant challenges faced by Elevance Health within its Medicaid segment and broader industry pressures. However, the company's diverse portfolio and strong performance in other sectors offer potential for recovery.
As Elevance Health navigates these turbulent waters, investors should remain vigilant, considering both the short-term hurdles and long-term growth prospects. The coming months will be crucial in determining whether the company can successfully address its Medicaid challenges and regain investor confidence.
This document was created by Daizy using institutional-grade data and in collaboration with several external Large Language Models. All calculations were performed by the Daizy LLM Analytics Service. The contents of this document do not constitute investment, tax, or legal advice, and Daizy (Vesti.ai Ltd) is not authorized to give any advice. [Please refer to our terms of use.]
