Value Investors Tribe

Analysis Date: June, 2023

For the analysis of any business, I use the framework described by Warren Buffett in 2007 letter to shareholders. Warren Buffett looks for four parameters particularly: a) Understandable business economics b) Long-term growth prospects c) Able and trustworthy management d) A sensible price tag.

Business Economics and its Moat

Elevance Health is one of the leading health benefits company which is in the business of providing health insurance to individuals as well as businesses. The company was started in 1944 and is in business for last 80 years. Longevity in this industry is critical and Elevance Health uses it in branding to build trust which leads them to serve 47.5 million medical members throughout their affiliated healthcare plans. Retention rates in healthcare industry are high and there are only a few instances in which a user changes its health insurance. Main reasons for these are insufficient in-network providers and friction in utilization of facilities caused due to cost, inefficient system, complicated technology or any such factors. Elevance Health is aware of this and hence is continuously expanding its in-network providers as well as optimizing technologies to make access to health insurance smooth. Elevance health is also making progress to provide more value at the same cost increasing the value for money. Strong brand name, reliable in-network providers and being in a industry where retention rates are about 90% provides key competitive advantages to Elevance Health.  

Growth Prospects

Elevance health has license to provide health insurance in 50 states, District of Columbia and Puerto Rico. This gives Elevance health opportunity to expand organically as well as through acquisitions. Health insurance is not a “once in a lifetime” purchase and hence the sales are recurring. With widening of moat, Elevance health is likely to provide better value for money 5 years from now which will lead to market share gains. Over the past ten years (2012-2022), revenues have grown at 10%, net earnings have grown at 9% and free cash flow has grown at about 13%.

Management Trustworthiness

Elevance Health has been communicating periodically with the investors and has been open in explaining its future plans and strategies. However, there have been considerable legal and regulatory issues in the past. There was a data breach in 2015 which potentially compromised data of 78.8 million people. Merger of Elevance Health with Cigna was blocked by Federal judge in 2017 on the basis of antitrust grounds. Similarly there have been issues with providers, state regulators etc. in the past. Despite being in heavily regulated industry, the frequency of issues in the past raise some red flags.

Valuation

Elevance Health is a business with competitive advantages spread over its brand name and network effects caused by in-network providers. To calculate the intrinsic value of the company, DCF was used with conservative assumption of free cash flow growth of 6% with terminal growth rate of 2%. Given some of the regulatory issues in the past, discount rate of 8% is used for the analysis. DCF analysis is shown in table below-   

• Sum of Present Value of FCF (million $): 65257.2
• Terminal Value (million $): 208142.1
• Present Value of Terminal Value (million $): 105808.9
• Total Equity (million $): 171066.1
• Shares Outstanding (millions): 237.50                                                                                                                          
• Intrinsic Value (per share): $720
• Current Trading Price: $500
• Margin of Safety: 31%

What does this mean? Based on DCF, intrinsic value of Elevance Health is $720 per share. Additionally, Elevance Health has repurchased shares in December 2023 at an average price of $473.05 per share.

Disclaimer: This fundamental analysis of Elevance Health is primarily for educational purposes so as to help value investors learn core concepts. This is not a buy or sell recommendation of any form whatsoever. Reader discretion is advised.