Medical Specialities company Elevance Health is taking Wall Street by surprise today, falling to $406.17 and marking a -3.9% change compared to the S&P 500, which moved -0.0%.
ELV currently sits within range of its analyst target price of $415.81, which implies that its price may remain stable for the near future.
Surprisingly, analysts give the stock an average rating of buy, which shows that they believe prices could continue to move. Over the last year, Elevance Health has underperfomed the S&P 500 by -13.2%, moving 9.8%.
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 17.2, based on its trailing EPS of $23.6. The company has a forward P/E ratio of 13.9 according to its forward EPS of $29.25 -- 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 22.94, 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 1.53 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.
To deepen our understanding of the company's finances, we should study the effect of its depreciation and capital expenditures on the company's bottom line. We can see the effect of these additional factors in Elevance Health's free cash flow, which was $3.17 Billion as of its most recent annual report. The balance of cash flows represents the capital that is available for re-investment in the business, or for payouts to equity investors as dividends. The company's average cash flow over the last 4 years has been $6.45 Billion and they've been growing at an average rate of -17.8%. ELV's weak free cash flow trend shows that it might not be able to sustain its dividend payments, which over the last 12 months has yielded 1.6% to investors. Cutting the dividend can compound a company's problems by causing investors to sell their shares, which further pushes down its stock price.
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 2.01, but is still below the average P/B ratio of the Health Care sector, which stood at 3.19 as of the third quarter of 2024.
Elevance Health is likely overvalued at today's prices because it has a Very low P/E ratio, a lower P/B ratio than its sector average, and positive cash flows with a downwards trend. The stock has poor growth indicators because of its weak operating margins with a stable trend, and an inflated 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.
