Elevance Health Earnings: Solid Start to 2023 Boosts Our Fair Value, Despite Emerging Headwinds

Elevance Health ELV turned in strong first-quarter results that contributed to a mild increase in its 2023 outlook. Considering those strong trends and cash flows generated since our last valuation change, we are increasing our fair value estimate to $520 per share from $478. Our narrow moat rating appears intact, too, built on the firm’s local scale leadership that helps it offer lower premiums than most health insurers, despite some emerging regulatory headwinds.

In the first quarter, Elevance turned in 11% revenue growth, 17% operating profit growth, and 16% adjusted EPS growth on strong trends in the firm’s medical insurance and Carelon (pharmacy benefit management and caregiving services) businesses. In medical insurance, revenue grew 10% and operating profits grew 17% year over year. Medical membership growth of 3% was led by Medicaid (9% growth) and Medicare Advantage (7%) while its commercial stronghold was only flat year over year. In recent years, Medicaid membership growth has been helped by a pause of redetermination activities during the public health emergency, and the first quarter marks the last quarter before those activities resume and ineligible Medicaid members may be forced to look for coverage elsewhere, like on the individual exchanges or employer-sponsored plans. Eventually, we suspect there will be a membership mix shift from Medicaid to those commercial plans, but this headwind creates a near-term risk to profits, especially if there is a gap in coverage. The Carelon business also turned in a strong quarter with 18% revenue growth and 21% operating profit growth on 4% prescription growth and an expansion of services rendered per consumer served.

With this strong start to the year, Elevance raised its 2023 outlook for adjusted EPS by about a dime to at least $32.70, which would represent the low end of management’s long-term outlook of 12%-15% annual earnings growth, if achieved. Our expectation for 2023 remains slightly above that new goal.