Morningstar | Upgrading Humana to Narrow Moat, Affirming Anthem's Strong Competitive Footing; Raising FVEs
As we continue to refresh our managed-care coverage, we're upgrading Humana to a narrow moat rating while raising our moat trend outlook for both Humana and Anthem to stable from negative. We've reaffirmed Anthem's narrow moat rating and have raised our fair value estimates for both firms.We think Humana has been successful in carving out competitive advantages in its market niche of Medicare Advantage. The firm has garnered market share levels that approach nearly a third of MA enrollees in the states it has the largest presence, helping to support the cost advantages and network effects that underpin its narrow economic moat. As a result of these competitive strengths, Humana has posted returns that have exceeded its cost of capital consistently over the last decade. With MA program rate cuts now in the rearview mirror, and the Medicare-eligible demographic continuing to gain share over the next five years, we believe the firm's underlying moat is worthy of a stable trend rating. A combination of the moat upgrade and a more favorable cash flow forecast drives our fair value estimate to $281 per share from $215.
We're raising our fair value estimate for Anthem to $306 per share from $234 largely to reflect higher cash flow estimates in combination with our new stable moat trend rating. The firm's novel Blue Cross Blue Shield product licenses allow it to dominate in the primary 14 states in which it operates. We're encouraged by the strategic vision laid out by CEO Gail Boudreaux, which includes a return to growth in the firm's commercial segment, an improved pharmacy cost structure with the accelerated launch of its in-house pharmacy benefit manager, and a willingness to partner with fellow Blue plans to expand its reach into new states. While the growth trajectory laid out at Anthem's recent investor day looks somewhat aggressive, we're happy to see a concrete stand-alone strategy after the firm's attempt to acquire Cigna failed in 2017.
Humana is a holding company. Through its subsidiaries, the company is a health and well-being company. The company manages its business with three segments: Retail, which consists of products sold on a retail basis to individuals including medical and supplemental benefit plans, such as Medicare and state-based Medicaid Contracts; Group and Specialty, which consists of employer group commercial fully-insured medical and specialty health insurance benefits, including dental, vision and life insurance benefits, as well as administrative services only; and Healthcare Services, which includes pharmacy solutions, provider services, clinical care services, and predictive modeling and informatics services
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