Goldman Upgrades Anthem To Buy; Sees Earnings Upside Potential

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  • Anthem Inc ANTM shares have been volatile over the last three months, and have lost 8 percent since October 20.
  • Goldman Sachs’ Matthew Borsch upgraded the rating for the company from Neutral to Buy, while raising the price target from $160 to $168.
  • Anthem’s proposed repricing of the PBM contract with Express Scripts Holding Company ESRX could potentially offer a multi-year boost to EPS, Borsch stated.

Anthem has indicated that it could have annual savings of $3 bn or more if it is able to lower drug pricing by about 15 percent under a renegotiated PBM contract with Express Scripts. “Even if the full amount is not achieved, our discussions with industry consultants suggest the savings could be substantial (e.g., 10%+),” analyst Matthew Borsch wrote.

He added that while Anthem could pass on most of the savings to customers, its earnings could be boosted by at least 20 percent of the targeted savings, which translates to about $600mn, or an EPS boost of $1.30. This would be primarily “an indirect result of market share gain from enhanced affordability,” Borsch noted.

The analyst expects this to flow through as a multiyear boost to earnings. While the 2016 EPS estimate of $11.00 does not reflect this at all, the 2017 estimate of $12.75 incorporates about $0.40. The estimates also exclude potential impact from Anthem’s proposed merger with CIGNA Corporation CI.

Borsch mentioned that there is 23 percent upside to the price target of $168, with the stock trading at a discount of more than 25 percent to the sector.

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Posted In: Analyst ColorLong IdeasUpgradesPrice TargetAnalyst RatingsTrading IdeasGoldman SachsMatthew Borsch
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