Why Did Elevance Health Stock Fall 15%?

Elevance Health (NYSE: ELV) recently reported its Q3 results, with revenues exceeding but earnings missing the consensus estimates. The company reported revenue of $44.7 billion and adjusted earnings of $8.37 per share, compared to the street estimates of $43.5 billion and $9.66, respectively. Furthermore, the company cut its full-year earnings outlook. This did not sit well with the investors and the stock plunged 14% last week. Let’s dive deeper into the company’s performance and its impact on the stock.

How Did Elevance Health Perform In Q3?

Elevance Health’s revenue of $44.7 billion in Q3 reflects a 5.3% y-o-y growth, led by a solid 15% rise in Carelon sales. Carelon includes Carelon Rx and Carelon Services. The segment growth can be attributed to the Paragon Healthcare acquisition earlier this year. Elevance Healthcare’s total Medicaid membership base shrunk by 1.5 million to 45.8 million in Q3, due to eligibility redeterminations. Roughly, 25 million people have been disenrolled from Medicaid since April 2023. During the pandemic phase, states kept people enrolled in Medicaid with the backing of federal funding. But this policy ended in March 2023, and the states had to renew eligibility for all Medicaid enrollees. ^[1] This has led to a decline in the Medicaid membership base, including that of Elevance Health.

The key metric which investors were eyeing was the benefit expense ratio, which came in at 89.5%, versus 86.8% in the prior-year quarter. The adjusted operating margin contracted 70 bps to 5.3%. The company reported adjusted earnings of $8.37 per share, as compared to $8.99 in the prior year quarter.

Overall, Elevance Health’s Q3 performance wasn’t great, despite a top-line beat. Furthermore, investors weren’t happy with the outlook for both 2024 and 2025. The company lowered its 2024 earnings outlook to $33 per share, versus its prior outlook of $37 per share. For 2025, the company expects only a mid-single-digit earnings growth, implying adjusted EPS of around $35, versus the consensus estimate of around $39. It appears that the medical costs aren’t going to come down anytime soon, and this clubbed with a lower Medicaid base, may continue to weigh on Elevance Health’s performance over the coming quarters.

What Does This Mean For ELV Stock?

It is evident from the decline in ELV stock that the investors weren’t happy with the outlook. At its current levels of around $430, ELV stock is trading at 13x its 2024 expected earnings of around $33. The 13x figure compares with the stock’s average P/E ratio of 14x seen over the last three years. A slight decline in valuation multiple seems justified, given the bleak outlook for 2024 and 2025.

ELV stock has underperformed the broader markets this year, with the stock down 8%, while the S&P 500 index is up 22%. Looking at a slightly longer term, the increase in ELV stock over the last three-year period has been far from consistent and has largely been as volatile as the S&P 500. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is less volatile. And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

[1] Returns as of 10/21/2024
[2] Cumulative total returns since the end of 2016

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1. KFF News Release, Sep 18, 2024 [↩]