The first important observation is ANTM share price tracks EVA well. Focusing on fundamentals pays.
It's time to look deeper into the dynamics of market expectation (MiM) and reality (EVA momentum).
Notice that the market expectation has been generally more optimistic than reality; MiM tends to be substantially higher than EVA momentum.
Here is a question: Knowing the EVA momentum – MiM information above, would you buy ANTM stock in 2015 at 230/share? What makes it reasonable?
My answer to that: It is very reasonable IF we know EVA would rise significantly in 2016. Otherwise, it is not reasonable. In 2015, I would call ANTM a distressed company. I know that because its EVA was spectacularly negative and getting more negative at an alarming rate.
Sure enough, the market follows sharply when ANTM could score EVA momentum of 9.2% in 2016. The market rewards ANTM achievement by lifting its share price significantly which in effect means the market puts high hopes in ANTM with MiM of 10.0%. The problem is, MiM is the average expected EVA growth rate for 5 years (or so in my calculation), and it is highly unlikely ANTM could maintain that fantastic EVA momentum.
In 2017, EVA momentum falls short of that expectation. EVA momentum in 2017 was 1.4%. That's still good progress, but it is far away from the expectation when ANTM share price was 1000/share. It should be no surprise that its share price falls to 570 in 2017.
Things then got more interesting in 2018. ANTM EVA continues to grow in 2018 at an even better pace. EVA momentum was 4.2%. Amazing EVA growth. Sure enough, the market responds by lifting the share price higher from 570 to 750 in 2018. Interestingly enough, MiM was only 2.0%. This is the first time the market puts future expectation that is lower than EVA momentum. It was a good bet for investors. It is not a coincidence that ever since then, ANTM share price has been moving higher, and now we are at 810/share.
So here we are now. Is ANTM still a good bet at 810/share? Implied market expectation is not pessimistic, but it is not high, especially considering last year's performance where EVA momentum was 4.2%. With the current price, MiM is just 2.9%. There is indeed a good reason to invest IF we believe ANTM would increase its EVA momentum at a rate faster than 2.9%. Unfortunately, as you have seen in the chart, my calculation shows that EVA momentum for the twelve last months in Q3 2019 is -5.3%.
Performance Analysis
Frankly by now, after studying the dynamics above and after seeing ANTM EVA slumped in Q3 2019, I do not find ANTM to be attractive at the current price (810/share). For the sake of completion, let's take a brief look at its performance.
Here is ANTM EVA. It trended up in 2015 until 2018, but it reverses course in this year.
The reason why ANTM could increase its EVA is mainly that EVA margin went from -36.3% in 2015 to -8.6% in 2018. For those of you more familiar with ROIC, ROIC went up from -6.7 to 4.1% during that period.
This is how ANTM managed to increase its EVA margin
It's easy to see why NOPAT margin increased in those years if we look at gold price
The value story is quite different in 2018:
It looks to me that ANTM is in a serious condition of idle capacity, particularly since 2014. For years, there was not much activity in their huge mining sites. That changed a lot in 2018 when sales growth doubled. Idle capacity is buried in the balance sheet, but it is still a cost for investors who fund them. It is unfortunate that the exceptional sales growth also contributes negatively to value because it happens when ANTM is not yet profitable (EVA margin is still negative). Regardless, the net effect of sales growth is positive, so it is still good.
What now? The story of better capacity utilization since ANTM changed its focus to export still holds, but curiously enough, gross margin has declined despite a rally in gold price. Certainly not good. Why is that? I strongly suspect this is the effect of higher tariffs (read: trade wars). Note that ANTM export makes up almost 70% of its sales in Q3 2019.
It has become clearer to me now. Export plays a significant part in ANTM sudden spike in sales. But that got ANTM to be negatively affected by trade wars – even when gold price has been rising throughout this year. This condition makes sales growth less desirable. That would change only if gold price rises significantly.
From what I see, if you believe gold price could rise significantly over 1-2 years, then it would make sense to invest in ANTM as that could potentially offset the effect of the trade war and send its EVA higher substantially. However, I believe anything less than a substantial increase in gold prices is not good enough. We are still dealing with market expectation MiM of 2.9% here.
Comments