Elevance Health (ELV)

Total return at 5 years: 3.9%/year = 2.1% appreciation + 1.9% dividend. The target price ($468) is ex-dividend; the $41 in dividends collected over 5 years are added separately.

The methods disagree: one places the value today above the price ($422) and the other below.

Today — expensive, no margin of safety: at $422 trades ~2.6% above its value discounted to today (~$411); the expected return does not even reach the risk-free rate (4.5%).

At 5 years — Preserva valor: the target price ($468) plus dividends yield just enough to preserve nominal capital, below the required 4% floor.

The bridge: the return at 5 years falls below the risk-free rate (4.5%) — which is why there is not even a discount to today's value. To require a 15% annual return, it would need to be bought at ~$260.

Educational / informational. Does not constitute investment advice.

The inverse approach: instead of projecting growth to obtain the value, the market price ($422) is taken as given and it solves for what annual owner-earnings growth would need to hold for 5 years for the present value —at the method's rate (4.5%, no-growth terminal)— to equal that price. It is the disconfirmation test: the expectations the price already pays for, contrasted against the method's projection.

The market discounts less growth (-2.4%/year) than we project (3.3%/year) → if the base case holds, there is margin: perception is more pessimistic than the estimated reality.

That growth implies ~$5 bn of owner earnings in year 5 (vs ~$6.7 bn of our base case). It recalculates if the DCF assumptions are edited.

Year-by-year projection of the selected scenario. From each year, two versions of the flow are derived: growth FCF (operating flow − total capex, the cash surplus) and maintenance FCF (the owner earnings: what the business yields if it only sustains its capacity). The flow is returned almost in full (dividend + buyback) or redeployed into the operation, so that EV stays roughly flat and multiples compress because the metric grows, not because of cash accumulation. The valuation is done on EV/EBIT — suma de las partes por segmento. In edit mode, revenue, margins, capex, and exit multiples can be adjusted.

Elevance is valued as a sum of the parts because its three segments are of different natures: Health Benefits assumes underwriting risk (premiums set in advance against uncertain medical cost), CarelonRx is a pharmacy volume business with margins partly delegated to CVS, and Carelon Services is a capital-light care management services business expanding its margin. The gross sum of segment revenue (US$238.8bn in FY2025) exceeds consolidated XBRL revenue (US$199.1bn) by 19.9% because CarelonRx bills the company's own affiliated health plans: those intercompany sales are eliminated on consolidation and do not represent double counting of the real business, only an artifact of how the segments are aggregated. That is why the base case exit multiple is not a single number but the average of the pieces weighted by segment: Health Benefits at the floor of the managed care band (medical cost and membership pressure), CarelonRx in the middle range (operational dependence on CVS through 2027), and Carelon Services near the ceiling (the fastest-growing segment with margin expansion). The consolidated operating margin has been eroding steadily and verifiably: 5.29% in FY2022, 4.96% in FY2023, 4.44% in FY2024, 3.62% in FY2025 and 2.71% over the last twelve months to June 2026, the product of an elevated medical cost trend across the health insurance sector. The company guided in July 2026 to diluted earnings per share of at least US$20.10 (GAAP) and US$27.00 (adjusted) for fiscal year 2026, with operating cash flow of at least US$6,000 million, and management itself described 2026 as the base year from which it expects to resume adjusted earnings per share growth of at least 12% in 2027. Year 1 of the path anchors to that guidance (both anchors: revenue via the recent quarterly growth pace and earnings via the EPS guidance), and the following years reflect a partial recovery, not a return to historical margins. Maintenance capex is taken as practically 100% of total capex (`maintPct`≈1.0): capex over the last twelve months (US$1,175M) sits below depreciation and amortization (US$1,513M), so there is no room for growth capex when not even the replacement of existing assets is covered. The tax rate (15.6%) is the real effective rate for the period, not an assumed typical rate. Share repurchases are material (~3.6%/year historically, moderating) and are modeled with an explicit declining share path.

Today's elevated multiple is the price of growth: if the business grows, the entry point cheapens on its own going forward (the metric grows while EV stays roughly flat). The exit multiple at 3 years is higher than the terminal at 5 years —at 3 years there is more growth still ahead—, so the value curve shows whether value creation is concentrated in the early or the later years. The required return is applied to the base scenario.

They are valued separately, with their own rationale, and are not incorporated into the base or the verdict (they are excess return). When assigning them value — in Editmode —, the total with optionalities updates live, without moving the base.

The verdict, the base CAGR, and the margin of safety are always calculated on the base; optionalities do not alter them (with optionalities at $0 they do not move).

Each card fixes a required annual return and answers: if the business is worth $468 in 5 years, what is the maximum that can be paid today to obtain that return? Since it now trades at $422, the margin of safety is how much cheaper the market is than that maximum. The three thresholds: 4% covers inflation (the floor), 10% is the long-term average return, and 15% is the level of a great investment.

With a target price of $468 in 5 years plus $41 of dividends collected (the dividend adds to the return, not to the price) and a required return of 4.5% annually, the maximum to pay today is $411. Against the current market price ($422), the margin of safety is -2.6% (trades above the maximum → a premium is paid) and the total return at that price would be 3.9% annually.

• Current entry multiple. The market price implies a multiple within the managed health insurance band, with no evident discount versus sector peers.
• Estimated 5-year total return. +4% against the market price under the base case, including dividend yield.
• Margin of safety today. No margin of safety: at this price capital is preserved, but it is not bought below its value.
• Sensitivity to margin recovery. The base case depends on the operating margin recovering partially by 2030; if it does not, the adverse scenario is the more likely one.
• Dividend yield. Current yield of approximately 1.7% at the market price, with a recent growth rate that is moderate relative to the company's history.
• Share buybacks. Sustained reduction in diluted share count (from 242.8 million in FY2022 to 217.9 million in the most recent quarter), amplifying per-share value from the eventual earnings rebound.
• Adverse scenario. The adverse case starts with the same medical cost pressure as today, with no recovery, and a multiple compressed toward the floor of the band.

Each margin over sales, year by year: historical (solid line) → projection (dotted).

• ✕ ROIC exceeds the cost of capital (~10%)
• ✓ CFROIC backs up the ROIC (123%, cash vs. accruals)
• ✕ Healthy balance sheet (low corporate debt)
• ✓ Durable competitive moat (multiple advantages)

• Operating margin. Fell from 5.29% (FY2022) to 2.71% (trailing twelve months), the most severe and sustained compression in the company's recent history.
• Return on capital vs. the 10% bar. Return on invested capital is assessed against the absolute 10% bar.
• Cash conversion. Guided 2026 operating cash flow (at least $6,000 million) is below the trailing-twelve-month figure ($7,464 million), reflecting the same margin pressure.
• Capex vs. depreciation. Trailing-twelve-month capex ($1,175 million) falls short of depreciation and amortization ($1,513 million): there is no visible growth capex, virtually all of it is maintenance.
• Effective tax rate. 15.6% effective over the trailing twelve months, notably below the statutory rate — with no signs of a one-off accounting artifact.
• Earnings stability. Diluted earnings per share has been declining steadily (from $25.68 in FY2023 to guidance of at least $20.10 GAAP for FY2026).
• Non-recurring charges. The BCBSA antitrust settlement payment ($666 million, September 2025) and the CMS RADV audit provision ($935 million, first six months of 2026) distort the year-over-year GAAP comparison.

Annual levels from the official filing (10-K); the % over each bar is the year-over-year (YoY) growth vs the prior year.

The three drivers show the same pattern: volume (membership, consumers served) contracts across most lines while consolidated revenue keeps growing, sustained by price and by the mix shift toward CarelonRx and Carelon Services. This is consistent with a risk-insurance business (volume × price) where the price lever is offsetting — but not reversing — the loss of scale, and is the operational explanation behind the margin compression of the last four fiscal years.

The % are the annual (year-over-year) growth: each year —historical and projected— vs the prior one; the TTM (trailing 12m) vs the TTM of a year ago, to avoid overlapping windows. The historicals are exact figures from the official filings; the projected years come from the year-by-year model (the intermediate years without their own series are interpolated between the anchors). The projected columns (+1y…+5y) are 12-month windows counted from the TTM close (30-jun-2026): the projection starts from the most recently reported data, not the fiscal year. The projected base is realistic and unbiased — the risk discount is applied at the end, via the required return. The rationale for each metric is in the (i).

• Consolidated revenue growth. 6.3% year over year over the trailing twelve months, sustained more by price and by Carelon than by membership expansion.
• Membership growth. Total medical membership is falling (44.9 million in June 2026 versus 45.7 million at FY2024 close), with Medicare Advantage reversing sharply in 2026.
• CarelonRx growth. 20.7% year over year in FY2025, the group's fastest genuinely organic growth segment.
• Carelon Services growth. 57.7% year over year in FY2025, driven largely by the Carebridge and Centers Plan acquisitions, not solely by organic growth.
• Forward guidance. The company guided in July 2026 for a return to adjusted earnings-per-share growth of at least 12% in 2027, marking 2026 as the base recovery year.
• Reinvestment runway. With only ~10% of earnings allocated to organic reinvestment, the growth runway via internal capital is limited relative to capital returned to shareholders.
• ACA subsidy expiration. Enhanced individual-market premium tax credits expired at the end of 2025, with the risk of reducing enrollment and raising premiums for existing beneficiaries.

• Revenue recurrence. Premiums and administrative fee income are contractual and renew annually, with high short-term predictability.
• Product differentiation. Health insurance is largely a homogeneous product across BCBS licensees and national insurers; differentiation comes from network and service, not from the product itself.
• Pricing power. It can adjust premiums annually, but the adjustment arrives with a one-year lag relative to actual medical cost, which explains the recent margin compression.
• Operating leverage. Low: the risk business has a dominant variable cost (medical cost), so revenue growth does not translate linearly into more earnings.
• Behavior in recessions. Demand for health insurance is relatively inelastic, but government programs (Medicaid) are sensitive to state funding decisions during fiscal-tightening cycles.
• Dependence on critical third parties. CarelonRx delegates core pharmacy functions to CVS Health under an agreement in effect through December 2027, a single-vendor operational risk concentration.
• Exposure to government programs. Approximately a third of consolidated revenue comes from Medicare, Medicaid and the Federal Employee Program, exposed to rate changes and CMS audits.

Not all debt is equal: only the structural needs refinancing; the rest is operational (self-liquidating).

Structural debt is what is exposed to the contraction phase of the cycle; operational debt (leases, matched funding) self-liquidates with the business.

• !Leverage (net debt / EBITDA)Net debt / EBITDA 3.0x
• !Interest coverage (EBIT / interest)3.8x
• –Liquidity (current ratio)no data
• ✓Cash quality (CFROIC vs ROIC)CFROIC backs 123% of ROIC
• ✕Value creation (ROIC − 10% bar)-3pp
• ✓Malinvestment test (capex vs incremental ROIC)Capex/D&A 0.8x — no over-investment
• ✓Float / working capitalFrees up cash $0.7 bn (float / negative WC)
• ✓Dilution (SBC % of revenue + shares)SBC 0.1% of revenue

A traffic-light interpreted by the method (not generic): float (negative WC) adds up, capex is judged by incremental ROIC (malinvestment test), and a lender is not subjected to corporate solvency. The (i) shows the derivation of each number.

• Total debt. Approximately $31,000 million of gross debt against $10,200 million of cash and short-term investments.
• Operating cash generation. $7,464 million over the trailing twelve months, guided down to at least $6,000 million for 2026.
• Repayment capacity. Debt is manageable relative to current cash generation, though margin compression reduces the available cushion.
• Stock-based compensation. SBC of just ~0.1% of revenue and ~4% of free cash flow: immaterial, no special adjustment needed in the metric.
• Reserves and provisions. The medical claims liability (Days in Claims Payable) held relatively stable in the recent quarter, with no evident signs of under-reserving in the available data.
• Non-controlling interest. Practically nil (less than 0.3% of net income), with no material effect on per-share valuation.

Who owns the shares — the alignment and whether there is a controlling shareholder.

• CEO track record. Gail Boudreaux has led since 2017 with nearly two decades of prior experience in health insurance (UnitedHealthcare, Aetna).
• Ownership alignment. No controlling shareholder; directors and executives together own just over 1% of the capital, according to the 2026 proxy.
• Capital allocation discipline. 85% of earnings goes to combined dividend and buyback, even during the margin compression period, leaving little flexibility if the cycle does not turn.
• Transparency on the deterioration. Management explicitly acknowledged the medical cost deterioration and adjusted guidance accordingly, rather than attributing it solely to external factors.
• Guidance consistency. Earnings guidance was revised upward in July 2026 after a better-than-expected second quarter, but it follows successive downward revisions in prior quarters.

• Motivated sellers: the company has come off successive quarters below medical-cost expectations, with the stock falling as guidance revisions piled up.
• One-off/restructuring: the $666 million payment for the BCBSA antitrust litigation settlement (September 2025) and the CMS RADV audit charge ($935 million in the first six months of 2026) distort the year-over-year GAAP comparison.
• Bottom of the medical-cost cycle: the post-pandemic utilization and medical trend cycle hit the entire managed care sector in 2024-2025, not just Elevance, and sector normalization — if it occurs — would benefit all players equally.

The margin of doubt is genuine: there is no clear evidence yet that medical cost is normalizing (2026 guidance only just marks the floor), so part of the market discount may reflect a reality that has not improved yet, not just excessively pessimistic perception.

The annual return (CAGR at 5 years) in each scenario, with the total period return below — the margin of safety made visual: upside range wide, downside range narrow.

Even in the bear scenario, the return holds at -6%/year (-28% total): the margin of safety protects the downside. The bull (+16%/year, +110% total) exceeds it comfortably — a favorable asymmetry, with a narrow downside range and a wide upside range.

• Medical cost and underwriting. Profitability depends on correctly anticipating future medical cost under premiums set in advance; the deviation between projected and actual is not recovered within the contract period.
• Government programs and RADV audits. A third of revenue comes from Medicare and Medicaid; there are pending CMS RADV audits with a $935 million provision recognized in the first six months of 2026.
• Exit from Medicare Advantage markets. Medicare Advantage membership fell 15.9% year over year as of June 2026, reversing FY2025 growth.
• ACA subsidy expiration. Enhanced individual-market premium tax credits expired at the end of 2025, with the risk of reducing enrollment and raising premiums for remaining beneficiaries.
• Dependence on CVS Health in CarelonRx. The core pharmacy services agreement with CVS Health expires in December 2027, with an option for a three-year extension; an unfavorable renegotiation would affect CarelonRx's economics.
• Cybersecurity and data. The company processes sensitive information for millions of members under a complex regulatory framework (HIPAA); a material breach could lead to litigation and penalties.

Each thinker's analytical framework applied to our data.

• Buffett / Graham Quality + margin of safety

  Fails the quality gate: narrow moat, eroding.

• Peter Lynch Growth at a reasonable price (GARP)

  A stalwart growing 3% at a multiple/growth of 6.3 → expensive for its growth.

• Joel Greenblatt Cheap and high-return (Magic Formula)

  Earnings yield 5% (EBIT/EV) + ROIC 7% → falls outside the Magic Formula.

• Howard Marks Perception vs reality + cycle

  The price discounts -2% vs our 3%: perception is more pessimistic than reality, with an identified source of the discount.

• Seth Klarman Capital protection (bear scenario)

  Bear-scenario floor -9%/yr over 5y (material loss) → risk of permanent capital loss.

• Pat Dorsey Moat strength (Five Rules)

  A narrow moat, eroding; sources: efficient scale, switching costs, intangibles, cost advantage, network effects → fails the Five Rules.

• Aswath Damodaran Expectations implied by the price

  Justifying the price requires discounting -2%, within what we project (3%) — the story squares with the numbers.