Elevance Health, Inc: A Deeply Undervalued Long-Term Opportunity | FAST Graphs

0:00 Hello everybody. It's Chuck Cardell, co-founder of Fast Graphs, the fundamentals analyzer software tool, aka Mr. Valuation. In today's video, I'm going to take a deep dive look into what has happened and what has been occurring in a lot of these managed healthc care companies, but specifically for this video, Elevance, which I think is one of the most attractive in the sector. Now, I covered this company about eight months ago, and I'll be referring to that throughout the video, but let's take a look at what's happened. Now I'm going to state it emphatically at the beginning. I think we have seen some basic issues in the company's fundamentals primarily based on Medicare and Medicaid and some of the other government programs in the Affordable Care Act. But what I also have seen is

0:45 what I would consider to be a dramatic overreaction in stock price. Now stock prices are often emotionally driven. I've talked about that so many times and it just it it really bothers me how investors react to this short-term volatility of stock prices. The fundamentals matter as I say all the time and they matter a lot and in times of crisis and there is a crisis going on in these medical companies here these managed health care companies United Healthcare CVS etc. All right. But the bottom line is Sentine Corporation is another one that comes to mind. But the bottom line is these companies are here to stay. At least in my opinion because health care is here to stay and people are going to continue to need that. So let's go ahead and take a deep dive into Elephants and

1:31 look at it compared to what it looked like eight months ago relative to what it looks like today. So here we have the current fast graphs on Elephants Health. And again, just to reiterate and to maybe inform those who aren't familiar with my work, the orange line on this graph is the earnings per share of the company plotted at in the case of elements with a with an 11% historical growth rate and that includes the forecast years included here. It warrants about a 15 fair value malt. All right, so the orange line represents the intrinsic value of the company over each of these different periods. All right. Now, this is a very dynamic tool. I can run it through all these different time frames, and I'll do some of that here in a little bit. The gold line on the graph

2:17 is the dividends per share. The company started paying a dividend in 2011. They started out paying a dollar a share. And you'll see that dividend has grown every year. And I also want you to note that the company has a very low dividend payout ratio. And as I'll talk about here in a moment, it's extremely well covered with cash flows. But now what's happened is because of some margin pressures especially in some of these government programs Medicaid Medicare etc. we've seen now a drop in earnings. Now we saw a flattening of earnings in 2024 but now we're expected to see a 9% drop in earnings. management just came out in their most recent report which was about two three days ago and they talked about the fact that their guidance is now for $30 a share which is

3:05 what FastGraphs is reporting. Now this is adjusted operating earnings. I also want to point out because I get this question almost every video. There's also another form of earnings called diluted earnings or gap earnings that will show different blended PE ratios and different valuations. This includes accounting adjustments and this company just did change their name from Anthem to Elephants and they also have been active in acquisitions and share buybacks etc. So their their diluted earnings include one-time events and non-cash charges but adjusted operating earnings are really the adjusted earnings number is what most companies report on and they talk about and that's what I think you get the best correlation to price. So now if I add

3:51 weekly closing stock prices to the graph, the key point is and I emphasize this over and over is that in the long run the company's stock price which is the black line will track earnings at some level. There will be times when it gets undervalued. Coming out of the recession of '08 we saw a sustained period of several years where the company traded at very low PE ratios under 15. The orange line is a 15 PE ratio. Here we see PE ratios of 10, nine, etc. Okay. Then we also see periods where the market will overvalue the stock ever so slightly. That was in May of 2015 and that led to the price dropping again to a low PE. But notice how the price keeps moving up and down

4:37 but coming back into alignment with the orange line. Ultimately, the fundamental value of the company which is represented by the orange line is really what matters most. Now, let's put what's going on here in perspective. I'm going to shorten the time frame a little bit so we can see this a little more closely. First of all, we see that we're expecting a 9% drop in earnings. I do want to point out, let me add a couple years to this, that the $30 estimate for 2025 will be the third largest earnings year that the company has ever had in its history. So, we're not talking about a company going bankrupt and we're talking about a drop in earnings of 9%. But that led to some significant drops in price

5:22 for this year. So, if I start this year out at December here, well, let me try to get to the close to J. We'll do we'll do December six here. Just it it really doesn't matter. We see that the stock price over this period of time has fallen about 28%. But again, we're only seeing about a 9% drop in earnings. So the stock price has fallen three times further or deeper, if you will, than the fundamentals have dropped. In the long run, earnings determine market price, as this graphic clearly illustrates. In the long run, the company's stock price is going to go where the earnings go. But in the short run, we see all these shortrun volatilities, periods of overvaluation and periods of undervaluation. Because

6:08 in the short run, markets are often driven by emotion. Now, the two most important emotions are fear and greed. Hey there. Sorry to interrupt this video, but we have something truly exciting to share with you. We've been listening closely to what you, our community of do-it-yourself investors really want. Clear guidance, expert insights, and a supportive group that understands your journey. That's exactly why we created Value You, a live coaching and learning community built for real people managing their own portfolios. Here's what you'll experience as part of Value You. Live Zoom sessions with our friendly team of investing coaches ready to answer your questions and guide you every step of the way. Personalized strategies tailored to your unique goals,

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7:41 Want to learn more? Join us for a free Zoom info session and choose the time that works for you. Either Tuesday, August 5th at noon or Thursday, August 7th at 400 p.m. Eastern Standard Time. We'll walk you through the program, answer your questions, and help you decide if LUU is the right fit for you. Register here. We can't wait to welcome you and show you how powerful investing can be, especially when you're part of a community that's got your back warmly, the value team. When you see the price above the orange line, those are periods of greed. When you see the price below the orange line, like we saw in COVID here, those are periods of fear. And typically fear becomes the more powerful

8:26 phenomenon. And that's why I think we see such a massive overreaction. Now the stock went from being overvalued in 2024 in September of 2024. It was overvalued even based on the earnings that were actually reported and the drop from there has actually been closer to 49%. Okay, it's annualized at 54%. And we've seen this, we'll call it 50% annualized loss over this period of time here. This September of 24 to July 22nd of 2025, which was yesterday's close. All right. So, what I see now is a stock that has moved into very deep valuation territory. Now, I want to talk a little bit about some of the things that are

9:11 going on and some of the things that are being talked about with the company. Okay? Okay. So, I want to put this business into perspective as much as I can. All right. So, first of all, Eleance is a leading for-profit health insurer in the United States. It's actually the second largest and it was known as Anthem prior to 2022 where they rebanded themselves. They serve over 118 million Americans throughout a nationwide business with four key business segments and then several subsidiaries. Most notably for the company is their Caroline health care services and wellpoint Medicare, Medicaid and commercial health plans in in select markets for the company. So they appear to be extremely undervalued right now resulting from what I have

9:57 already said is an extreme overreaction of the price dropping to what has been a troublesome period of time for the company with some margin pressures and so on. We'll look at that here in a moment. But discounted cash flow analysis would indicate a fair value of about $450 a share. That's this the stock moving back into alignment as it always has to fair value to the orange line, if you will. And that would give us a fair value by the year end this year, which is four or five months away. Basically, a doubling in the price. If I actually measured that, if I went from today's price, if we bought it today and it did move into alignment with fair value by December of 2025, that would represent almost a doubling of your

10:44 money in a short period of time. That would represent 63% growth. So, what I'm saying is the stock is about 63% undervalued based on year-end numbers and current estimates and guidance. Now, I'm going to look out further for you. Also before I do, I want to look at some other important metrics through the FastGraph research tool. First of all, I want to look at operating cash flow. This company does pay a 2.4% dividend yield. It has even an operating cash flow yield over 9%. Now, cash flows have been dropping more dramatically, if you will, than adjusted operating earnings. But the first point I want you to note is we've got very strong cash flows covering the dividend almost three four times the coverage of the dividend. If I

11:29 go to free cash flow to equity, which is the free cash flow to the equity owners, you're looking at a company that has a free cash flow yield of 8.41%. And once again, it significantly covers the dividend. So one thing I think is important here I don't see any real risk at these levels cedus parabus as long as things don't change dramatically from here based on the company's coverage of their dividend now one of the bright spots in the most recent earnings report management reported a 14% increase for the quarter over 14% on revenues and as you can see revenues have continued to grow and this company is now trading at a price to sales of 34 and their normal

12:16 price to sales is about 61. So again, another indication that the company is extremely undervalued. So let's go back into adjusted operating earnings now, which I like as the the best valuation metric, although price to sales was pretty attractive also and even more encouraging considering there was no drop in the sales. All right, but we'll look at margins here in a moment. All right. So, the bottom line is we've got a company that's trading at one of its lowest valuations. So, let's look at forecasting and discuss a little bit about what's happened with forecast. Now, I did a video on this company about eight months ago. Let's go into that for a minute. And this is what Elements looked like in the video. And you can find a video. It's what the earnings

13:01 miss means for Elevate's future. And that was done again about eight months ago on the video was actually dated at the close of October 22nd, 2024. Okay, so not quite a year ago. Now, the company looked like it was beginning to get undervalued at that time and we had seen the first drop, but we still had expectations for over $34 a share in earnings for 2025. Now guidance just came out and management said $30 and most analysts now the 21 analysts reporting to Faxet are giving current estimate of $30 a share. Again the third most profitable number in the company's history. Now just the most recent estimate prior to that was for $34.20

13:49 and that was down from $3450 six months ago. All right. Analysts were also forecasting $39 a share for 2026. That number is now dropped to $33.25 and they were expecting over $40 adjusted operating earnings per share in 2027. That's now down to $38. But given that and given the fact that that growth about 8 and a half to 8.6% 6% growth. That would warrant a 15 PE ratio or an earnings yield of 6 and a half to 7%. And by the way, the company's normal multiple over the last five years has been about 15.4 times earnings, which is even a little higher. And if you look at the company historically, all these years, it's

14:35 always had PE ratios in the 13 to 15 range. So even a 13 PE ratio or a 12p ratio for the company would still indicate a very attractive rate of return looking out to the end of 2027. 25% annualized and that's at a 13 that's at a 12.34 PE which is only slightly higher than what we currently have. But again, at my fair value discounted cash flow, intrinsic value calculation, we stand to make 35% a year. But what's really exciting is that we would almost double our money by year end, assuming the company's stock price began to recover. Now, today, the stock price is

15:22 doing pretty well. If we um go into Yahoo estimates here or or go into Yahoo, we can see that the current quote is up $9.50 to or $1048. Now that's almost a 4% 3.7% increase. And I also want to point out that I have posted a article on Yahoo Finance where I cover a lot of the reasons why the business should do well and some of their strategic initiatives and some of the regulatory and industry trends going on and then I put in some of this forecasting information and at the end I talk about the fact that elements is a dominant diversified force in the US health insurance and it's well positioned for long-term growth. I still believe that and I still see that as

16:09 I've pointed out already many times throughout this video. This is a very strong overreaction to a fundamental issue that is then a lot less severe than the market has driven it to. But let's go into fiscal fitness here and let's look at a couple of items here that I think are important. The one thing I want to look at is margins. Okay. And the company's operating margins have been weakening. And that's part of the reason why you see the cash flows and everything else dropping, but they're actually still holding up reasonably well. Their net margin is still holding up reasonably well. Again, it's not good. It's not perfect. It's down a little bit, but it's still pretty good. Same thing can be said about return on assets. Same thing can be said

16:55 about return on equity. And the same thing can be said on return on capital. the company's still maintaining some decent numbers in those areas. Now, if I go into fund graphs, one of the things that's I think important to recognize in this company and I look at a custom chart that I built here, if I look at share buybacks, this company since 2005 has really been aggressively buying back their stock. That's slowed down a little bit in 2019, 2021, and 2023, but I do believe the company is going to continue to buy back stock. And I like that given the fact that they were buying back stock most of the time as I have evaluated it when the valuations were reasonably low. And right now would be a great time in my opinion for the company

17:42 to be buying back more stock which could also be another positive for investors going forward. Now in the video I also the video I did eight months ago I also talked about some other things that I think are really important to understand about elements. I talked about the bright spot for insurers was the commercial market where they contract with employers to cover their workers and unlike government programs where insurers have limited control over payment rates in the commercial market they can control their own destiny. Okay. So, insurers should eventually be able to see improved profits. I think that's still a valid statement. As I went on in this video, I also talked about the fact that the company is very

18:28 confident in their long-term growth strategy and expected to deliver at least a 12% growth annually over time. Now, they've lowered this a little bit to about 9%, but that's still very very attractive in in my view. So, as I look at the only way we're going to know that is to look back a month or two or three from now and know. But if you were looking for an extremely high quality company, A-rated stock with a long-term debt to capital of under 40%, I think it actually might have ticked up a little bit closer to 40% right now. An earnings yield of over 11% which is almost double what I look for in a company. Not quite, but almost. Trading at a nine blended PE multiple. I just don't see how you can miss taking a position in this company

19:13 now, especially if you're a long-term investor. Now, let's talk about investing for the long term. These downturns are going to happen, but I don't believe like Warren Buffett, couple of things. You should invest in a business you like and expect to own it permanently or for a very long period of time. So, I'm making long-term calls here. I'm not making calls for the next month or six months. Although even towards the end of 2025, there could be a big opportunity for this stock to simply revert to the mean. Can it do it that quickly? Maybe not. Can it do it over the next two or three years? I think it's almost an inevitability. And looking at history, it's really rarely ever taken more than that. Now there was this period come out of the recession which everyone needs to remember this

19:59 was a time frame of extreme pessimism and since about 2014 or 15 we've then gone into this period of almost extreme optimism not just in elephants but in stocks in general. So the bottom line here is I see a company that's very well positioned. Again, it's the second largest US health insurer. They own about 15% of the market. They leverage their size with competitive pricing and broader market networks. Its main competitors are United Health Group, the largest with about a 34% market share. Next is CVS Health, Etna, and then Sigma, Humanana, and Kaiser Permanente. Elevance advantages in my opinion include its scale, its product diversity and investments in technology and

20:46 digital health. Now their financial performance this last quarter which they just reported. They did report robust revenue growth in Q1 of 2025 up almost 15% year-over-year. Their quarter 2 revenues of 49.4 billion were up 14.3%. However, they also saw a 24% decline in net income, which I showed earlier, to 1.74 billion in EPS missed estimates. So, they attribute this to rising medical costs, especially in the Affordable Care Act and Medicaid plans, which have pressured margins and prompted a downward revision of the 2025 guidance. Nevertheless or nonetheless, the company's Carolon segment pharmacy and health services has grown rapidly

21:33 and is supported by acquisitions and product expansion. So from strategic initiative point of view, Elements is focused on operational efficiency and technological innovation and valuebased care. It's also requesting pretty big rate increases from the regulatory area. And all in all, I think if you're looking for a solid business with long-term opportunity that's put together a really impeccable history, notwithstanding what's going on now with the political change we saw with the the big beautiful bill, so to speak, making some cuts in some of these government sponsored programs or at least some reductions, not necessarily cuts. We see this big overreaction and we see a long-term opportunity in my opinion to

22:19 do extremely well. Again, a 15 multiple by 2027 on reduced earnings estimates would still give us a 35% annualized rate of return. Anyway, this has been Chuck Carter of Elco Fast bring you an update on elements. The Fastgraph's fundamental analyzer software tool is such an invaluable tool to help investors make informed decisions and I hope you all see how overreactive the market has been in this particular example currently. The only way they haven't been is if the fundamentals continue to deteriorate and some of these forecasts don't happen. Now, the company does have an impeccable analyst scorecard. And if you want to know more about what's going on with the company, go to Yahoo Finance and type in

23:05 Elevates, the symbol ELV. And I did post an article there where I went through some of the things and summarize some of the things I've covered in this video. If you enjoyed the video, give me a like, ring the bell, subscribe to our channel, and thanks again for watching. We appreciate you all. Again, I do think this is a long-term opportunity. I don't know if it's the perfect bottom at this point or not, as I said earlier, but it's certainly a good long-term value in my humble opinion. Thanks for watching.