Elevance Health Declines 20% in 3 Months: Time to Sell the Stock?

Core Viewpoint - Elevance Health, Inc. has faced significant challenges leading to a 20% decline in its stock over the past three months, underperforming compared to the industry and broader market indices [1] Membership and Revenue Impact - The company has experienced a 3% year-over-year decline in overall membership as of September 30, 2024, primarily due to member attrition in the Medicaid business [1] - This decline in membership is expected to negatively impact premium growth, which is a major component of Elevance Health's revenue [1] Expense and Margin Pressure - Total expenses for the first nine months of 2024 increased by 1.9% year over year, with benefit expenses rising by 1.2% and the cost of products sold escalating by 10.3% [2] - The projected benefit expense ratio for 2024 is around 88.5%, indicating a deterioration of 150 basis points from 2023 [2] Debt and Financial Flexibility - As of September 30, 2024, Elevance Health's long-term debt stood at $24.7 billion, a 6.2% increase from December 31, 2023, leading to a 9.6% rise in interest expenses year over year [3] - The company's declining cash generation is concerning, with net cash from operations dropping 53.8% in the first nine months of 2024 compared to the prior year [4] Earnings Projections - Elevance Health has revised its 2024 adjusted net income projection down to a minimum of $33.00 from a previous minimum of $37.20, reflecting a 0.4% decline from 2023 [5] - Earnings estimates for 2024 and 2025 have been significantly revised downward by 10.3% and 14.4%, respectively, raising investor concerns [6] Strategic Initiatives - The company is expected to benefit from strategic initiatives, including expansion plans in individual state or federally-facilitated marketplaces in 2025 [7] - The Carelon unit is anticipated to improve due to enhanced risk-based capabilities and increased product revenues [7] Valuation - Elevance Health is currently trading at a forward 12-month price-to-earnings ratio of 12.03X, which is lower than the industry average of 14.66X, indicating it may be undervalued [8] Conclusion - Despite the stock appearing undervalued, ongoing challenges such as issues in the Medicaid business, rising costs, high leverage, and declining cash flows persist, suggesting current investors may consider booking profits [10]