Morningstar | Anthem's 2019 Outlook Surpasses Expectations, Driven by Enrollment Growth and PBM Cost Savings
Anthem reported fiscal fourth-quarter and full-year results that largely tracked our expectations for medical enrollment, premium growth, and profitability. However, management provided 2019 guidance that meaningfully exceeded our expectations across the board, and we expect to raise our fair value estimate by a double-digit percentage as we update our model. Underlying this better performance is total medical membership that is expected to increase by roughly 1.2 million lives, reflecting growth of 3% and suggesting market share gains across the firm's commercial risk and Medicare Advantage books. While we continue to reassess the competitive landscape in the managed-care industry following the mergers of CVS/Aetna and Cigna/Express Scripts, we plan to leave our narrow moat and negative moat trend ratings for Anthem in place for now.On top of strong operating performance, the company announced the early termination of its contract with Express Scripts following the latter company's acquisition by Cigna. Anthem will begin to move clients onto its internal IngenioRx pharmacy benefit management platform in partnership with CVS Health in the second quarter of 2019 over a 12-month transition period, which will begin to provide benefits to clients and shareholders ahead of schedule. Management still expects the new contract terms will provide $4 billion in annual savings for the firm with a full-year contribution now expected in 2020, nearly a year earlier than prior expectations. Importantly, 80% of this savings is still slated to accrue to Anthem clients in the form of more affordable healthcare costs, with the remainder falling to the bottom line. Management suggested the firm's cost trend in 2019 is likely to be similar to the 5.9% reported in 2018, but we believe additional savings from pharmacy could drive this metric lower throughout the year.
The combination of stronger enrollment growth and the pull-forward of cost savings resulted in 2019 earnings guidance that was nearly $2.00 per share ahead of our model, or roughly $1.50 per share ahead of the current consensus. Management expects the company to earn at least $18 per share on a GAAP basis or $19 per share on a non-GAAP basis for the year. Following this morning's positive reaction, the stock now trades near 16 times management's adjusted earnings target, which doesn't seem too onerous a valuation level for a company likely to increase EPS at a high-single-digit clip over the coming years.
Anthem is an insurance holding company. Through its subsidiaries, the company is a health benefits company, serving medical members through its affiliated health plans. The company has three segments: Commercial & Specialty Business, which provides fully-insured health products, managed care services to self-funded customers, and other insurance products and services; Government Business, which includes Medicare and Medicaid businesses, its subsidiary, National Government Services, and services provided to the federal government in connection with its Federal Health Products and Services business; and Other, which includes pharmacy benefits management business and integrated health services business.
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