Standing out among the Street's worst performers today is Elevance Health, a medical specialities company whose shares slumped -13.9% to a price of $427.75, 29.08% below its average analyst target price of $603.17.
The average analyst rating for the stock is buy. ELV lagged the S&P 500 index by -14.0% so far today and by -29.3% over the last year, returning 7.3%.
Elevance Health, Inc., together with its subsidiaries, operates as a health benefits company in the United States. The company is part of the healthcare sector. Healthcare companies work in incredibly complex markets, and their valuations can change in an instant based on a denied drug approval, a research and development breakthrough at a competitor, or a new government regulation. In the longer term, healthcare companies are affected by factors as varied as demographics and epidemiology. Investors who want to understand the healthcare market should be prepared for deep dives into a wide range of topics.
Elevance Health's trailing 12 month P/E ratio is 15.0, based on its trailing EPS of $28.58. The company has a forward P/E ratio of 10.3 according to its forward EPS of $41.67 -- 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 third quarter of 2024, the health care sector has an average P/E ratio of 26.07, and the average for the S&P 500 is 29.3.
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 1.11 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 $6.76 Billion as of its last annual report. Over the last 4 years, the company's average free cash flow has been $6.43 Billion and they've been growing at an average rate of 12.2%. With such strong cash flows, the company can not only re-invest in its business, it can afford to offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in ELV have received an annualized dividend yield of 1.3% on their capital.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (its share price divided by its book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method. Elevance health's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 2.35, but is still below the average P/B ratio of the Health Care sector, which stood at 3.53 as of the third quarter of 2024.
Elevance Health is likely fairly valued at today's prices because it has a Very low P/E ratio, a lower P/B ratio than its sector average, and generally positive cash flows with an upwards trend. The stock has mixed growth prospects because of its decent operating margins with a stable trend, and an above average PEG ratio. We hope this preliminary analysis will encourage you to do your own research into ELV's fundamental values -- especially their trends over the last few years, which provide the clearest picture of the company's valuation.