Normally, buying at 52-week high prices is not a good idea. But, in the case of Anthem Inc. (ANTM, Financial), the company's 40 million medical members offer a solid base to see if the pharmacy benefits management business is a good fit or not.
When Anthem announced plans to set up a PBM, it confidently predicted a smooth rollout. It has been anything but that so far. The unit, IngenioRx, was supposed to help the company save billions of dollars a year on prescription drugs. It is anticipated to launch in 2020, but in May the executive leading the rollout quit to head up Diplomat Pharmacy (DPLO), the largest independent provider of specialty pharmacy services in the U.S.
With the nation’s largest drugstore chain CVS Health (CVS, Financial) buying Aetna (AET, Financial), a competitor of Anthem's, the combined companies would pose a real problem for Anthem's own PBM goals. Also, Anthem announced it will officially move its PBM contract from Express Scripts to CVS once the current agreement ends in 2020. That is happening whether IngenioRx is up and successful or not, as most analyst do not believe that Anthem will have enough scale or pricing power to compete with the major PBMs. So, why not partner with the largest drugstore?
Anthem provides health insurance nationwide, including under the brand name Blue Cross Blue Shield in 14 states, through a plethora of products across every major insurance segment -- individual, group and government-sponsored. In the last decade, the company has seen slow and steady growth across all major financial metrics. Revenue has surpassed $91 billion in the last 12 months, up from $61 billion in 2008. Net profit thanks to new corporate tax benefits is expected to come to $4.6 billion in 2020. More importantly, the company has been buying back stock to boost book value and earnings per share, which now sit at $112.49 and $17.23 per share, respectively. Buybacks are expected to continue, further improving both of these numbers. And, the company has done all of this while spending a quarter of its net income on capex.
The new integration is going to be risky, not in terms of capital output, but rather in terms of reputation if it fails. Anthem is one of the most powerful bands in the health care industry, which gives the company's products a major durable competitive advantage. For example, here in Washington, D.C., Blue Cross and Kaiser Permanente are the only choices. And, with arguably the largest provider network, it is as close to a single-payer system in the states it operates in as our government can currently allow.
From a valuation standpoint, the stock will only grow more valuable. The question is whether it is worth owning at the current price. The answer is a clear no.
First, Anthem is already trading well above the company's five-year average price multiples. From that standpoint, the fair value is closer to $250 a share. Second, if the market is looking toward a recessionary period, as JPMorgan predicts, the drop will hurt every stock, even leading insurance firms.
Disclosure: I am not long or short Anthem.
