Analyst Note| Julie Utterback, CFA |
Narrow-moat Anthem reported fourth-quarter operating results that slightly beat FactSet consensus but gave guidance for 2021 that appears constrained by ongoing COVID-19 uncertainty. While the 2021 outlook is slightly disappointing, we do not expect to materially change our $370 fair value estimate. Also, with shares trading at roughly 12 times forward earnings and the company aiming to generate 12% to 15% annualized earnings growth in the long run, we continue to see Anthem's stock as undervalued.
While the ongoing pandemic constrained the U.S. employer environment and related membership rolls at Anthem, the company's overall medical membership increased 5% year over year on the strength of its government programs. Specifically, Anthem's government programs, including Medicaid and Medicare Advantage, increased in the midteens year over year, while Anthem's employer-based business remained roughly flat from the end of 2019. In total, Anthem's medical membership stood at 42.9 million members at the end of December, up from 42.6 million at the end of September and 41.0 million at the end of December 2019.
With that resilience, Anthem beat expectations slightly in the quarter, even as healthcare utilization increased and the company continued to waive cost-sharing for end users related to COVID-19. In the quarter, Anthem reported adjusted EPS ($2.54) that slightly beat FactSet consensus, and the company slightly beat its 2020 earnings guidance of at least $22.30 per share by turning in $22.48 of earnings (16% growth). However, the firm gave an underwhelming EPS outlook of at least $24.50 per share for 2021, or slightly below our expectations and only 9% growth over 2020. Without $0.50-$0.70 of new COVID headwinds in 2021, Anthem's guidance would have been closer to our expectations and management's own initial guidance given in October for the low end of its 12%-15% long-term EPS growth goal. Positively, though, those headwinds look likely to abate in 2022.