Analysts' Choice: Centene Makes Medicaid Pay

3/6/2017


  Recent Price
$72
  Dividend
$0.00
  Yield
0.0%
  P/E Ratio
17
  Shares (millions)
176
  Long-Term Debt As % Of Capital
43%
  52-Week Price Range
$75.57 - $50.00

Shares of Centene ($72; CNC), the largest private Medicaid administrator, have rallied 28% in 2017, ahead of the 7% gain for the S&P 500 Index. Only one S&P 500 health insurer has staged a stronger rally.

Despite the recent rally, Centene's prospects look bright. And concerns regarding the fate of the Affordable Care Act seem well reflected in the insurer's share price. Centene, with a Quadrix Value score of 95, is a Focus List Buy and a Long-Term Buy.

Unique market position

Centene has 11.4 million medical members, broken down as follows:

• 6.9 million for Medicaid.

• 2.8 million for the military program TRICARE.

• 1.2 million for commercial plans.

• 334,300 for Medicare.

• 39,400 for correctional facilities.

Uncertainty over the future of the Affordable Care Act poses a risk for all health insurers. Unlike most insurers, Centene has turned a profit from the ACA exchanges. State and federal exchanges accounted for 540,000 of Centene's members at the end of 2016, down from 680,000 members at the end of March, due to expected attrition. As rivals scale back on exposure to exchanges, Centene scooped up more than 1 million members during the 2017 open enrollment period. Centene says the risk profile for these individuals is similar to previous years.

Centene's Medicaid membership has more than doubled since ACA launched in 2014, pushing its share to a leading 13% slice of the highly fragmented market. The U.S. expects Medicaid spending to rise at an average annual rate of 6% over the next decade to reach $973 billion by 2025.

Congress has yet to disclose its strategy for handling the ACA. The program's popularity would put lawmakers in a tough spot if they repealed it without a replacement or devised an alternative that caused a large swath of Americans to lose their existing insurance.

With a stock-market value of $12.7 billion, Centene is dwarfed by the other five managed-care companies in the S&P 500, including Humana, the second-smallest insurer at more than $21.5 billion. Given its recent deal to purchase HealthNet, Centene may view itself as an acquirer rather than takeover target. But Centene's Medicaid business and relatively small size may lure potential suitors.

Conclusion

As witnessed by Centene's rocky September quarter, the HealthNet integration can create temporary speed bumps. Yet the stock's low valuation may signal undue pessimism. Centene shares look cheap at 17 times trailing earnings, versus the average of 19 for S&P 500 health insurers. Centene is the only stock in its industry to trade below its five-year average P/E.

Per-share profits are projected to climb 40% in the March quarter, with growth stoked by Centene's $6 billion acquisition of HealthNet, completed in March 2016. For the year, Centene's profits are expected to climb 6%, and estimates have crept higher over the past 60 days. At 15 times estimated 2017 earnings, the stock trades 5% below its industry average.

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
Dec '16
1.19
vs.
0.97
86%
72.75
-
59.65
18 - 15
Sep '16
1.11
vs.
0.87
86%
75.57
-
55.60
20 - 14
Jun '16
1.29
vs.
0.76
98%
66.96
-
47.36
20 - 14
Mar '16
0.74
vs.
0.55
36%
68.42
-
53.92
22 - 17
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2016
40.41
4.43
0.00
75.57
-
47.36
17 - 11
2015
22.76
3.14
0.00
83.00
-
50.93
26 - 16
2014
16.56
2.26
0.00
54.24
-
27.56
24 - 12
2013
10.86
1.47
0.00
33.92
-
20.28
23 - 14
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
96
89
94
91
28
27
60

   * Earnings exclude special items.
   † Quadrix scores are percentile ranks, with 100 the best.
   NA Not available.


Current Hotline

Stock Spotlight

Individual Stock Reports

ISRs make stock research easy!

Perhaps the most valuable two page reports available anywhere.

All the data you would normally have to plow through years of 10-K filings, earnings reports, and reams of market data to assemble — yours all in one concise report.

ISRs contain our proprietary Quadrix scores — find out how we rate all the stocks in the S&P 500.

Visit us at individualstockreports.com