Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Companies Benjamin Graham Would Invest In Today - July 2016. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Anthem Inc (ANTM) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Anthem, Inc. is a health benefit company. The Company offers a range of network-based managed care plans to large and small employer, individual, Medicaid and Medicare markets. The Company has three segments: Commercial and Specialty Business, Government Business and Other. The Company’s Commercial and Specialty Business, and Government Business segments offer managed care products, including preferred provider organizations (PPOs), health maintenance organizations (HMOs), traditional indemnity benefits and point-of-service (POS) plans, as well as various hybrid benefit plans, including consumer-driven health plans (CDHPs), hospital only and limited benefit products. In addition, the Company also provides an array of managed care services to self-funded customers, including claims processing, underwriting, stop loss insurance, actuarial services, provider network access, medical cost management, disease management, wellness programs and other administrative services.
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Downloadable PDF version of this valuation:
ModernGraham Valuation of ANTM – August 2016
Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?
What kind of Intelligent Investor are you?
| Defensive Investor; must pass all 6 of the following tests. | ||||
| 1. Adequate Size of the Enterprise | Market Cap > $2Bil | $33,698,691,028 | Pass | |
| 2. Earnings Stability | Positive EPS for 10 years prior | Pass | ||
| 3. Dividend Record | Dividend Payments for 10 years prior | Fail | ||
| 4. Earnings Growth | Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end | 35.54% | Pass | |
| 5. Moderate PEmg Ratio | PEmg < 20 | 14.42 | Pass | |
| 6. Moderate Price to Assets | PB Ratio < 2.5 OR PB*PEmg < 50 | 1.43 | Pass | |
| Enterprising Investor; must pass all 3 of the following tests, or be suitable for the Defensive Investor. | ||||
| 1. Earnings Stability | Positive EPS for 5 years prior | Pass | ||
| 2. Dividend Record | Currently Pays Dividend | Pass | ||
| 3. Earnings Growth | EPSmg greater than 5 years ago | Pass | ||
Stage 2: Determination of Intrinsic Value
| EPSmg | $8.94 |
| MG Growth Estimate | 2.46% |
| MG Value | $119.95 |
| Opinion | Fairly Valued |
| MG Grade | B- |
| MG Value based on 3% Growth | $129.65 |
| MG Value based on 0% Growth | $76.00 |
| Market Implied Growth Rate | 2.96% |
| Current Price | $128.94 |
| % of Intrinsic Value | 107.50% |
Anthem Inc is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the poor dividend history. The Enterprising Investor has no initial concerns. As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.
As for a valuation, the company appears to be Fairly Valued after growing its EPSmg (normalized earnings) from $7.68 in 2012 to an estimated $8.94 for 2016. This level of demonstrated earnings growth supports the market’s implied estimate of 2.96% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value within a margin of safety relative to the price.
At the time of valuation, further research into Anthem Inc revealed the company was trading below its Graham Number of $136.63. The company pays a dividend of $2.55 per share, for a yield of 2% Its PEmg (price over earnings per share – ModernGraham) was 14.42, which was below the industry average of 16.56, which by some methods of valuation makes it one of the most undervalued stocks in its industry.
Anthem Inc performs fairly well in the ModernGraham grading system, scoring a B-.
Stage 3: Information for Further Research
| Graham Number | $136.63 |
| PEmg | 14.42 |
| PB Ratio | 1.43 |
| Dividend Yield | 1.98% |
| TTM Dividend | $2.55 |
| Number of Consecutive Years of Dividend Growth | 6 |
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Useful Links:
| ModernGraham tagged articles | Morningstar |
| Google Finance | MSN Money |
| Yahoo Finance | Seeking Alpha |
| GuruFocus | SEC Filings |
Most Recent Balance Sheet Figures
| Balance Sheet Information | 6/1/2016 |
| Long-Term Debt & Capital Lease Obligation | $14,202,400,000 |
| Total Assets | $64,062,600,000 |
| Intangible Assets | $25,621,900,000 |
| Total Liabilities | $39,829,000,000 |
| Shares Outstanding (Diluted Average) | 268,200,000 |
Earnings Per Share History
| Next Fiscal Year Estimate | $9.01 |
| Dec2015 | $9.38 |
| Dec2014 | $8.99 |
| Dec2013 | $8.20 |
| Dec2012 | $8.18 |
| Dec2011 | $7.25 |
| Dec2010 | $6.94 |
| Dec2009 | $9.88 |
| Dec2008 | $4.76 |
| Dec2007 | $5.56 |
| Dec2006 | $4.82 |
| Dec2005 | $3.94 |
| Dec2004 | $3.05 |
| Dec2003 | $2.73 |
| Dec2002 | $2.26 |
| Dec2001 | $1.65 |
Earnings Per Share – ModernGraham History
| Next Fiscal Year Estimate | $8.94 |
| Dec2015 | $8.74 |
| Dec2014 | $8.25 |
| Dec2013 | $7.95 |
| Dec2012 | $7.68 |
| Dec2011 | $7.25 |
| Dec2010 | $6.96 |
| Dec2009 | $6.58 |
| Dec2008 | $4.76 |
| Dec2007 | $4.52 |
| Dec2006 | $3.78 |
| Dec2005 | $3.08 |
| Dec2004 | $2.42 |
| Dec2003 | $1.84 |
| Dec2002 | $1.19 |
| Dec2001 | $0.55 |
Recommended Reading:
Other ModernGraham posts about the company
Other ModernGraham posts about related companies
Disclaimer:
The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.
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