To The Moon

$Elevance Health(ELV)$

Shares of Elevance Health (NYSE: ELV), the nation’s second-largest health insurer, slipped sharply after the company reported disappointing second-quarter earnings and lowered its full-year outlook. The stock fell nearly 5% in early trading as investors digested weaker-than-expected profitability and management’s acknowledgment of rising medical costs pressuring margins.

For long-term investors, however, the question is not merely about the latest quarterly miss, but whether Elevance’s competitive position and long-term growth prospects remain intact. Could this pullback present a buying opportunity in a high-quality company, or are there deeper issues lurking beneath the surface?

This article takes a closer look at Elevance’s Q2 results, the drivers of its guidance cut, the competitive and regulatory pressures it faces, and what investors should watch in the coming quarters before deciding whether to buy the dip.

A Closer Look at Q2 Earnings: Costs Bite Into Margins

On July 24, Elevance reported adjusted earnings per share of $8.13, up 2% year-over-year but below Wall Street’s consensus estimate of $8.25. Revenue of $44.4 billion came in slightly ahead of expectations, growing about 6% from the prior year thanks to continued enrollment gains across its Medicaid and commercial segments.

However, the story of the quarter was on the cost side. The company’s medical loss ratio (MLR) — the share of premium revenue spent on claims — climbed to 88.3%, up 80 basis points from a year earlier. This reflects higher-than-expected utilization, particularly in Medicare Advantage, where members are catching up on elective procedures deferred during the pandemic.

Higher utilization has become a theme across the managed care industry, with peers like UnitedHealth Group also reporting pressure in their Medicare books. Yet Elevance appears to have been hit slightly harder than expected, sparking concerns about pricing discipline and whether future rate adjustments can fully offset these trends.

Annual Guidance Cut Disappoints Investors

In addition to missing Q2 expectations, Elevance also cut its full-year outlook. Management now expects adjusted EPS of at least $33.20, down from its prior range of $33.70–$34.10.

CEO Gail Boudreaux attributed the reduction to “elevated medical costs in senior populations and some unexpected volatility in pharmacy benefits,” but emphasized that the company remains committed to long-term margin expansion through operational improvements and cost controls.

Investors were disappointed nonetheless, as the revised guidance implies essentially flat earnings growth for the year, well below the double-digit trajectory that many had modeled for Elevance.

Implications for UnitedHealth, Centene, and the Sector

The disappointing results and guidance reset at Elevance signal heightened pressure across the sector. UnitedHealth had already reported challenges earlier this year, and Centene even withdrew its guidance altogether amid the same trends. Investors should watch closely to see whether these results represent a temporary spike in costs or a more structural margin issue.

At the core of these problems are elevated medical utilization rates and new policy headwinds from federal cuts to Medicaid and ACA subsidies. These factors are eroding profitability in the lower-income segments of health plans, which are among the largest and fastest-growing parts of the industry.

Competitive Position Remains Strong

Despite the near-term challenges, Elevance continues to benefit from its broad scale, strong market positions in key states, and diversified business model. It remains the second-largest U.S. health insurer behind UnitedHealth and boasts leading Medicaid managed care franchises in states like California, New York, and Virginia.

The company’s commercial insurance business remains profitable, and its growing pharmacy benefits and care delivery segments add revenue streams that can mitigate medical cost pressures.

Additionally, the company continues to invest in technology and data analytics to improve care management — a critical capability in a world where value-based care and cost containment are paramount.

Regulatory and Political Risks Loom

However, investors must also acknowledge that Elevance, like all managed care organizations, faces meaningful regulatory and political risks.

Medicare Advantage, which has been a growth engine for years, is under increasing scrutiny in Washington amid allegations of overbilling and concerns over the program’s long-term sustainability. CMS has already proposed lower-than-expected payment updates for 2025, which could weigh on profitability if not offset by plan design changes.

Meanwhile, state Medicaid programs remain under budgetary pressure, and the redetermination process — which reviews Medicaid enrollees’ eligibility — could lead to member attrition and revenue headwinds in coming quarters.

Valuation: Attractive Relative to Peers?

Before writing off Elevance based on a single quarter, it’s worth noting that the stock now trades at a more attractive valuation.

At around $445 per share, Elevance trades for approximately 13.5x forward earnings, below its five-year average of 15x and also below UnitedHealth, which trades at roughly 17x forward earnings. Free cash flow generation remains strong, supporting ongoing share repurchases and a modest but growing dividend yield of about 1.3%.

For long-term investors with patience and tolerance for short-term noise, Elevance could offer a compelling risk/reward profile at current levels.

Key Catalysts and Risks Going Forward

Catalysts:

• Successful repricing of Medicare Advantage plans for 2025.

• Continued Medicaid membership growth despite redeterminations.

• Execution on cost-control initiatives and technology-driven care management.

• Potential for additional share repurchases given balance sheet flexibility.

Risks:

• Further increases in medical utilization trends beyond current assumptions.

• Adverse regulatory changes in Medicare Advantage or Medicaid.

• Competitive pricing pressures eroding margins in commercial plans.

• Ongoing volatility in pharmacy benefits segment.

Conclusion: Should You Buy the Dip?

Elevance Health’s disappointing Q2 and lowered outlook underscore that the managed care industry is grappling with real headwinds. Higher-than-expected utilization in senior populations, regulatory pressures, and pharmacy volatility are likely to persist in the near term, weighing on earnings growth.

However, Elevance remains a highly profitable, well-managed, and strategically diversified company with a strong competitive position in key markets. At a valuation below its historical average and with a proven record of operational execution, the stock may offer an attractive entry point for long-term investors who can stomach short-term volatility.

Takeaways for Investors:

• For long-term investors: This could be a buying opportunity in a high-quality name trading at a discount to historical norms.

• For short-term traders: Be cautious — sentiment could remain weak until there’s evidence that medical costs have peaked.

• For income-focused investors: Modest but growing dividend adds to total return potential.

In short, Elevance is a Hold-to-Buy for long-term investors, with a bias toward buying on further weakness. Those looking for a quick rebound may need to be patient, as cost trends and regulatory dynamics play out over the next few quarters.

As with any health care stock, staying informed on policy changes and monitoring quarterly updates will be key to navigating the road ahead.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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