Analysts' Choice: Centene Dodges Exchange Mayhem

5/9/2016


  Recent Price
$61
  Dividend
$0.00
  Yield
0.0%
  P/E Ratio
19
  Shares (millions)
126
  Long-Term Debt As % Of Capital
44%
  52-Week Price Range
$83.00 - $47.36

The public health exchanges created in response to President Obama's Affordable Care Act have not worked out as many insurers and American consumers envisioned. Centene ($61; CNC) has avoided the struggles dogging many other insurers on the health exchanges.

While UnitedHealth ($132; UNH) and other insurers compete for individuals who use higher-end plans, Centene focuses on those who rely on Medicaid. Centene's organic enrollment from the exchanges has remained healthy while other firms' growth sagged, and profit margins linger near the high end of management's targeted range. 

Centene, earning a Quadrix Overall score of 98, is a Focus List Buy and a Long-Term Buy.

New members and cost control

With its $6 billion purchase of Health Net completed, Centene now has 11.5 million members in 21 states. Texas and California account for 49% of those members. About 61% of Centene's members use Medicaid, while 18% use commercial plans. The remaining members are enrolled in programs for behavioral health, long-term care, foster care, or the aged, blind, or disabled.

Consistent with an economic recovery, health-care utilization is rising, resulting in higher medical costs for insurers. Yet Centene's medical loss ratio (MLR) actually fell to 88.7% in the March quarter. MLR reflects medical costs as a percentage of premiums, meaning lower is better. Centene cites three reasons for the improvement:

1) Greater efficiency with high-usage patients, especially long-term care.

2) Unusually strong growth at public exchanges, which run lower MLRs than other businesses.

3) Eight days owning Health Net, and its lower-MLR commercial members.

Centene expects costs to remain stable for the rest of 2016, though rising utilization will make proper pricing all the more important.

Centene serves 683,000 members on public exchanges in 15 states, though it expects membership to fall to 550,000 by December through normal attrition. Centene posted unexpectedly strong membership growth on the exchanges last quarter, even after accounting for the Health Net deal. Equally important, its member risk profile falls in line with management's expectations, signaling that the new growth shouldn't lower profitability. Centene will consider expanding into more states next year.

Conclusion

Centene does have some issues. The Health Net deal poses integration risks. Merger-related expenses have also exceeded management's original expectations.

But the stock looks reasonable at 15 times estimated 2016 earnings, a 14% discount to the median P/E for S&P 1500 managed-care providers. The consensus expects Centene to earn $4.19 per share this year, up 38%, on 75% higher revenue. Encouragingly, analysts expect both per-share profits and sales to rise more than 15% in 2017 — a vote of confidence in Centene's ability to deliver organic growth after the absorption of Health Net.

An annual report for Centene Corp. can be obtained 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
Mar '16
0.74
vs.
0.55
36%
68.42
-
47.36
22 - 15
Dec '15
0.95
vs.
0.63
33%
67.53
-
51.75
25 - 19
Sep '15
0.84
vs.
0.61
34%
83.00
-
50.93
33 - 20
Jun '15
0.73
vs.
0.39
37%
82.18
-
61.85
38 - 28
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2015
22.76
3.03
0.00
83.00
-
50.93
27 - 17
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
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
98
95
80
94
40
98
41

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


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