Is Anthem a Value Investment?
Many investors have been wondering if the expansion of health coverage under Obamacare makes companies like Anthem (NYSE: ANTHM) a value investment.
Anthem, which underwrites and markets health insurance under the Blue Cross and Blue Shield brands, has some of the characteristics of a value investment, including a wide moat and a lot of float. It is one of just two companies whose products are being sold on the Obamacare exchange in my part of Colorado for example; the other is UnitedHealth Group (NYSE: UHG).
The premiums on its insurance policies also give Anthem a lot of float. It reported having $19.46 billion in cash and short-term investments on September 30, 2015.
That float is growing too; Anthem’s revenue grew from $72.79 billion in September 2014 to $77.95 billion on September 30, 2015. That’s an increase of $5.16 billion in just one year.
This means that Anthem is doing very well right now and is paying off for investors. It offered a 3.29% profit margin, a 1.73% dividend yield and a 12.11% return on equity on September 30, 2015.
PESTLE Knows Best about Anthem
The question that we need to ask is, can this happy situation continue? To answer that, I’ll turn to PESTLE analysis. For those of you who did not take an MBA course, PESTLE stands for Political, Economic, Social, Technological, Legal and Environmental analysis. The idea is to examine the environment around a company to see how various factors affect its future prospects.
Here is a brief PESTLE of Anthem.
- Political – This is the most important factor affecting Anthem’s potential future. The company’s biggest risk right now would be that Obamacare could be repealed or modified. That’s unlikely given the complete disorganization of the Republican Party, which is officially opposed to Obamacare. Another threat is that private health insurance could be replaced with a single-payer program. There is significant support for single payer in the U.S. and some efforts to implement it on a statewide basis, but single payer advocates lack leadership and the resources to implement it on a national basis. A successful single-payer system could deprive Anthem of its core business.
- Economic – The current economics of health insurance in the U.S. favors large companies like Anthem. A number of nonprofit health insurance plans in several states have collapsed because they lacked the money to cover the benefits that they were promising.
- Social – This could be the biggest threat because popular opinion in the United States is running against corporations, including insurance companies. There is also growing resentment of high health insurance costs, which could lead to a popular movement against health insurance.
- Technological – Technological changes, such as the growth of insurance shopping online, favor large insurers like Anthem. The growing practice of selling coverage such as auto insurance online is getting customers used to the idea of purchasing coverage online. The growth of digital media and online insurance purchases could reduce expenses for insurers like Anthem and make tasks like claims processing cheaper in the long run.
- Legal – The big legal problems Anthem faces now are in the Affordable Care Act, the official name for Obamacare. Many of the legal issues surrounding the Act are still unsettled. The U.S. Supreme Court has ruled on many of the big questions, but the details remain unresolved. New challenges to the act could lead to new court rulings that could dramatically change the legal landscape.
- Environmental – Some recent developments, such as the spread of antibiotic-resistant super bacteria, could greatly increase the cost of medical treatment. Among other things, such germs could necessitate costly next generation treatments and increased hospitalization of patients. This could hurt Anthem by raising the cost of healthcare and increased claims.
The PESTLE results show us that the future looks rather bright for Anthem. If it can dodge the single-payer bullet, this company should remain a good value that will pay off for investors for years to come.