We've been asking ourselves recently if the market has placed a fair valuation on Elevance Health. Let's dive into some of the fundamental values of this large-cap Health Care company to determine if there might be an opportunity here for value-minded investors.
A Lower P/B Ratio Than Its Sector Average but Trades Above Its Graham Number:
Elevance Health, Inc. operates as a health benefits company. The company belongs to the Health Care sector, which has an average price to earnings (P/E) ratio of 30.21 and an average price to book (P/B) ratio of 4.08. In contrast, Elevance Health has a trailing 12 month P/E ratio of 18.0 and a P/B ratio of 2.84.
P/E rations can be placed into context by dividing them by the firm's expected 5-year EPS growth rate, which gives us its Price to Earnings Growth (PEG) ratio. Elevance Health's PEG ratio is 1.19, which tells us the company is fairly valued in terms of growth. PEG ratios under 1 are considered an indicator of undervalued growth, but we need to keep in mind that many successful companies with excellent share performance have maintained much higher PEG ratios.
As always, a quantitative approach to a stock should be supplemented with a look at qualitative factors, such as the competence of its management team, quality of its corporate culture, and the wide variety of social and economic factors that can impact the success of its product.
Growing Revenues With a Flat Capital Expenditure Trend:
| 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | |
|---|---|---|---|---|---|---|
| Revenue (MM) | $92,105 | $104,213 | $121,867 | $138,639 | $156,595 | $168,622 |
| Revenue Growth | n/a | 13.15% | 16.94% | 13.76% | 12.95% | 7.68% |
| Operating Margins | 6% | 6% | 5% | 6% | 5% | 5% |
| Net Margins | 4% | 5% | 4% | 4% | 4% | 4% |
| Net Income (MM) | $3,750 | $4,807 | $4,572 | $6,158 | $5,894 | $6,037 |
| Net Interest Expense (MM) | $753 | $746 | $784 | $798 | $851 | $1,000 |
| Depreciation & Amort. (MM) | $358 | $338 | $1,154 | $1,302 | $1,675 | $1,794 |
| Earnings Per Share | $14.19 | $18.47 | $17.98 | $24.95 | $24.28 | $25.15 |
| EPS Growth | n/a | 30.16% | -2.65% | 38.77% | -2.69% | 3.58% |
| Diluted Shares (MM) | 264 | 260 | 254 | 247 | 243 | 227 |
| Free Cash Flow (MM) | $2,619 | $4,984 | $9,667 | $7,277 | $7,247 | $8,246 |
| Capital Expenditures (MM) | $1,208 | $1,077 | $1,021 | $1,087 | $1,152 | $1,268 |
| Current Ratio | 1.56 | 1.66 | 1.55 | 1.47 | 1.4 | 1.41 |
| Total Debt (MM) | $35,992 | $37,087 | $42,736 | $48,193 | $52,362 | $57,016 |
| Net Debt / EBITDA | 5.91 | 5.08 | 5.0 | 4.66 | 4.85 | 4.83 |
Elevance Health has growing revenues and a flat capital expenditure trend, positive EPS growth, and irregular cash flows. However, the firm suffers from weak operating margins with a stable trend and a highly leveraged balance sheet.
