Analysts' Choice: Centene Won't Stay This Cheap For Long

10/26/2015


  Recent Price
$58
  Dividend
$0.00
  Yield
0.0%
  P/E Ratio
21
  Shares (millions)
123
  Long-Term Debt As % Of Capital
35%
  52-Week Price Range
$83.00 - $39.19

These are heady times for Centene ($58; CNC). Managed-care membership rose 38% over the last year. The addressable market is broadening. And on Oct. 23 — two days after this issue went to press — shareholders voted on the company's proposed purchase of Health Net ($63; HNT).

Despite a 7.5% rally so far this month, Centene shares have declined 28% since the July 2 merger announcement and now trade at 21 times trailing earnings, 13% below the five-year average and roughly in line with peers.

Centene joined the Buy and Long-Term Buy lists in the Oct. 19 issue. 

Government-driven growth

Centene's Medicaid-heavy business model has paid off in impressive style — sales up 49%, per-share profits 76%, and operating cash flow 69% in the 12 months ended June. In the June quarter, Centene served 4.6 million members, up 38% year-over-year. The consensus projects sales growth of 35% and per-share-profit growth of 26% this year, followed by 14% and 17%, respectively, for 2016. And that's not including Health Net.

Today, Centene generates more than four-fifths of its revenue from Medicaid. A combined Centene/Health Net would boast a more diversified revenue stream, though still heavily reliant on government payers.

Some investors worry about the acquisition because of its magnitude (Health Net generated more than $15 billion in revenue over the last year, nearly 80% of Centene's size) and price (a 21% premium to Health Net's price before the announcement).

----- % Of Revenue -----
Business Line
Centene
(%)
Company
(%)
Commercial
2
16
Medicaid
83
64
Medicare
1
8
Medicare/Medicaid dual-eligibles
4
Specialty svcs.
11
8

While acquisitions always involve risk, Centene has a history of integrating its purchases smoothly, albeit in far smaller bites. In addition, while shares of Health Net jumped after the news broke, they have since retreated; the deal is now worth $5.0 billion, down from the original $6.3 billion.

Merger benefits

Centene says the deal will:

• Add more than 20% to adjusted earnings per share in the first year and create $150 million in cost savings in the combined company's second year.

• Boost scale in an industry where size provides negotiating power.

• Expand its product portfolio and geographic reach, particularly in California, which has 12 million Medicaid beneficiaries, tops in the nation.

Assuming the cash-and-stock deal is approved, as we expect, it should close in early 2016.

With or without Health Net, Centene stands to benefit from the ongoing rise in public funding for health care. Hospital operator Health Management Associates estimates the number of Medicare and Medicaid beneficiaries will reach 165 million in 2024, up from 122 million last year, while membership in federal exchanges will triple to 21 million.

The company plans to release September-quarter earnings Oct. 27. Acquire an annual report for Centene Corp. at 7700 Forsyth Blvd., St. Louis, MO 63105, (314) 725-4477, www.centene.com.

CENTENE
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Jun '15
0.73
vs.
0.39
37%
82.18
-
61.85
34 - 25
Mar '15
0.52
vs.
0.29
48%
71.60
-
51.72
32 - 23
Dec '14
0.87
vs.
0.42
61%
54.24
-
37.53
31 - 21
Sep '14
0.67
vs.
0.44
56%
41.99
-
35.49
27 - 23
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2014
16.56
2.23
0.00
54.24
-
27.56
24 - 12
2013
10.86
1.44
0.00
33.92
-
20.28
24 - 14
2012
8.67
0.19
0.00
25.49
-
12.13
134 - 64
2011
5.34
1.12
0.00
20.41
-
12.54
18 - 11
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
96
91
78
97
37
81
35

   * Earnings exclude special items.
   † Quadrix scores are percentile ranks, with 100 the best.


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