Medical Specialities company Elevance Health is taking Wall Street by surprise today, falling to $434.8 and marking a -7.2% change compared to the S&P 500, which moved 0.0%. ELV is -23.95% below its average analyst target price of $571.75, which implies there is more upside for the stock.
As such, the average analyst rates it at buy. Over the last year, Elevance Health has underperfomed the S&P 500 by -14.0%, moving 1.2%.
Elevance Health, Inc. operates as a health benefits company. The company is categorized within the healthcare sector. The catalysts that drive valuations in this sector are complex. From demographics, regulations, scientific breakthroughs, to the emergence of new diseases, healthcare companies see their prices swing on the basis of a variety of factors.
Elevance Health's trailing 12 month P/E ratio is 16.9, based on its trailing EPS of $25.77. The company has a forward P/E ratio of 11.8 according to its forward EPS of $37.0 -- which is an estimate of what its earnings will look like in the next quarter. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the first quarter of 2023, the health care sector has an average P/E ratio of 24.45, and the average for the S&P 500 is 15.97.
It’s important to put the P/E ratio into context by dividing it by the company’s projected five-year growth rate. This results in the Price to Earnings Growth, or PEG ratio. Companies with comparatively high P/E ratios may still have a reasonable PEG ratio if their expected growth is strong. On the other hand, a company with low P/E ratios may not be of value to investors if it has low projected growth.
Elevance Health's PEG ratio of 1.16 indicates that its P/E ratio is fair compared to its projected earnings growth. Insofar as its projected earnings growth rate turns out to be true, the company is probably fairly valued by this metric.
When we subtract capital expenditures from operating cash flows, we are left with the company's free cash flow, which for Elevance Health was $7.25 Billion as of its last annual report. This represents the amount of money that is available for reinvesting in the business, or for paying out to investors in the form of a dividend. With its strong cash flows, ELV is in a position to do either -- which can encourage more investors to place their capital in the company. Over the last four years, the company's free cash flow has been growing at a rate of 9.8% and has on average been $7.29 Billion.
Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts). Elevance health's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 2.76, but is still below the average P/B ratio of the Health Care sector, which stood at 4.16 as of the first quarter of 2023.
Since it has a lower P/E ratio than its sector average, a lower P/B ratio than its sector average, and consistent free cash flow with an upwards trend, Elevance Health is likely fairly valued at today's prices. The company has mixed growth prospects because of an above average PEG ratio and weak net margins with a stable trend. We hope you enjoyed this overview of ELV's fundamentals. Be sure to check the numbers for yourself, especially focusing on their trends over the last few years.
