Anthem Project Part I & II final .docx

An indication of how proficiently management is

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an indication of how proficiently management is utilizing its assets to produce profit to investors and executives of the company. The higher the return, the more productive and efficient its assets are being used. Return on equity is the amount of net income returned as a percentage of shareholders equity. Just like return on assets, the return on equity ratio is a measure of profit and efficiency. An ascending trend for return on equity shows that a firm is increasing its ability to create profit without needing as much capital. Net Profit Margin Net profit margin is the percentage of revenue outstanding after all operating expenses, interest, taxes and preferred stock dividends have been subtracted from a company’s total revenue. The percentage represents how much of each dollar of sales is profit. A high net profit margin can indicate that an organization is pricing its products properly and is demonstrating good cost management. It is an extremely useful ratio when comparing businesses in the same industry. Table 6 Net Profit Margin (%) Company 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY Anthem Inc. 20.819 23.05 22.792 21.244 19.781 Aetna Inc. 25.463 26.018 27.22 26.6 26.277 Humana Inc. 21.177 21.307 18.457 17.235 19.103 United Health Group Inc. 24.442 25.304 23.567 23.472 23.37 Source: “Financial Ratios.” Performance Analysis. S&P Global Market Intelligence, . Price to Earnings Ratio Anthem Inc. has a weak PE Ratio when compared to its Peers. A lower PE Ratio indicates that investors are willing to pay less per dollar of profits. The years 2016 and 2017 were great years for Health Insurance profits and the industry saw a large increase in their PE Ratios. This jump in PE was largely due to the Medicare Advantage program where underwriting profitability rose 279%. Under this new program the federal government compensates insurers a fixed amount to cover Medicare-eligible Americans. Healthcare Insurers are profiting from this due to MBA602 Financial Analysis and Valuation, Group Project –Anthem Inc Valuation Page 14
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a large influx of healthier and younger retirees. This gave investors a strong indication of future earnings and as a result boosted Healthcare Insurance stocks. Table 7 PE Ratio Dec- 2013 Dec- 2014 Dec- 2015 Dec- 16 Dec- 2017 Anthem Inc. 10.54 13.29 14.38 15.39 15.68 Humana Inc. 12.98 19.14 20.88 49.72 14.76 Aetna Inc. 12.3 15.12 15.57 19.06 31.67 UnitedHealth Group Inc. 12.84 16.9 18.95 21.75 20.57 “Financial Ratios.” Performance Analysis . S&P Global Market Intelligence , . Simply looking at the PE Ratio trend for the group of companies listed below shows that Anthem Inc.’s stock is relatively undervalued when compared to its peers. The average PE Ratio for Anthem, Humana, Aetna, and UnitedHealth Group for 2017 is 20.67. By multiplying this to the EPS we can estimate Anthems stock price to be valued at $303.85. This multiple suggest that Anthem Inc. may be selling at a discount given that at the end of 2017 Anthem stock was selling at just $225.01.
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