Company Overview: Centene Corporation (NYSE: CNC) is a well-diversified, multi-national healthcare company that is engaged in offering a set of services to the government-sponsored healthcare programs. The company has remained committed to transform the health of the community for more than 35 years by delivering services to Federal, local, and international governments; members; healthcare providers; uninsured individuals and families. The company was founded in 1984 as a single health plan in Wisconsin and has gradually established itself as a national leader in healthcare services.

CNC Details

CNC Rides on Restructuring Activities & Acquisition Benefits: Centene Corporation (NYSE: CNC) is a well-diversified, multi-national healthcare company, involved in offering a set of services to the government-sponsored healthcare programs. The company provides services to under-insured and uninsured individuals through member-focused services. The company is also involved in delivering education and outreach programs to advise and assist members in retrieving quality, and proper healthcare services. The company remains on track to restructure its business in order to focus more on healthcare and bolster its capital structure by lowering its heavy reliance on debt. By doing so it focuses more to enhance its four platforms, namely Evernorth, U.S. Commercial, U.S. Government and International. The company’s enhanced concentration to streamline its overall operations makes it a trustworthy stock, which investors should consider for the medium to long-term.

The company witnessed a CAGR of 34.6% and 48.1% in total revenue and adjusted net earnings, respectively, over the period of FY15-FY19. The company remains on track to deliver on its growth strategies along with expanding its premium and service revenues profitably, through a diversified product portfolio and expanding geographic reach.

Past Performance (Source: Company Reports)

The company recently entered into a definitive agreement to buy Magellan Health, Inc. for a consideration of $95 per share in cash for a total enterprise value of $2.2 billion. This deal is likely to be completed in the 2HFY21 and is approved by the Board of Directors of both parties, which is subject to certain closing conditions. CNC expects the acquisition to be marginally accretive in the first year and further contribute to its adjusted EPS in low to mid-single digit percentage by the second year, which includes ~$50 million in annual net cost synergies. The deal comes after one year of CNC’s acquisition of WellCare Health, which leverages its position as the largest Medicaid managed care organization in the country. This apart, the company also declared the completion of its previously announced acquisition of specialty pharmacy PANTHERx Rare to serve the underserved group. This is another great step for CNC, to strengthen its foothold in the thriving specialty drug market. Further, the company closed the Apixio acquisition, a healthcare analytics company providing AI technology solutions. These acquisitions are intended to expand the company’s market share and bolster its Medicaid membership and is also expected to boost CNC’s revenues in the quarter’s ahead.

A Quick Look at 3QFY20 Results: During the quarter, the company reported adjusted earnings of $1.26 per share, which soared 31.3% from the prior corresponding period on the back of robust revenue. Total revenue during the quarter came in at $29.1 billion, up 53% year over year, primarily aided by the WellCare buyout, growth in Health Insurance Marketplace business, expansions, and new programs. Also, reinstatement of the health insurer fee in 2020 aided the top-line growth. Nevertheless, Illinois health plan divestiture remains a headwind during the quarter. The managed care membership stood at 25.2 million as of September 30, 2020 and increased 65% year over year. During the quarter, adjusted Selling, General & Administrative (SG&A) expense ratio as a percentage of revenues came in at 8.9%, down from 8.8% reported in the year-ago period.

Key Financial Highlights (Source: Company Reports)

Balance Sheet and Cash Flow Update: The company exited the quarter with cash and cash equivalents of $12.2 billion. Total assets stood at $68.4 billion as at 30 September 2020, as compared to $40.9 from the level at 2019 end. Long-term debt at the end of the quarter amounted to $16.7 billion. Net cash provided by operating activities as of September 30, 2020 came in at $2.5 billion compared with net cash provided by operating activities of $2.1 billion, reported in the year-ago period.

Cash Position (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders together form around 50.36% of the total shareholdings while the Top 4 constitutes the maximum holding. The Vanguard Group, Inc. and T. Rowe Price Associates, Inc. are holding a maximum stake in the company at 10.79% and 6.94%, respectively, as also highlighted in the chart below: 

Data Source: Refinitiv, Thomson Reuters, Chart Created by Kalkine Group 

Key Ratios Metrics: The Company reported Sep’20 gross margin at 16.9%, higher than Sep’19 figure of 15.6%. Operating margin during Sep’20, stood at 4.4%, higher than Sep’19 figure of 3.5%. Net margin in the same time span stood at 1.9%, higher than Sep’19 figure of 0.5%. Sep’20 debt to equity ratio stood at 0.65x, lower than the previous quarter figure of 0.67x. ROE of the company stood at 2.2% during Sep’20, higher than the Sep’19 figure of 0.8%. There was an improvement in the liquidity of the company to 1.25x in 3QFY20 as compared to 1.01x in 3QFY19.

Profitability and Liquidity Profile (Source: Refinitiv, Thomson Reuters), Analysis by Kalkine Group  

Risk Analysis: CNC operates in a highly competitive environment, which is subject to ongoing significant changes, including business consolidations, new strategic alliances, market pressures, and regulatory and legislative pressures.  The company is also exposed to risk associated with general global economic and market conditions, particularly those impacting the healthcare industry. Also, higher expenditure and adverse currency translations add to the woes. The company is set to report its 4QFY20 results on 9 February 2021.

Outlook: For FY21, CNC expects total revenues to be between $114.1-$116.1 billion. Adjusted EPS is expected to be in the range of $5-$5.30. For FY21, the company expects Health benefits ratio (HBR) in the range of 86.6-87.2%. Whereas SG&A expense ratio is projected to be between 8.8-9.3%. The company remains on track to perform well as it enters into 2021. Coming to FY20 projections, the company expects revenues to be between $109.8 billion-$111.4 billion and adjusted EPS to be in the range of $4.9 and $5.06. The company’s bottom-line is likely to be benefitted from growing medical membership, which can primarily be attributed to several contract gains and expansion across different regions. The company also remains on track to benefit from organic growth, favorable product mix, strong Medicaid business, and the addition of members through new programs and expansions. Going forward, the company’s acquisition strategies, membership growth, expansion of contracts and other investments are expected to boost the overall growth of the business.

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative) 

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group 

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: Over the last three months, the stock went down by ~4.48%. The stock made a 52-week low and high of $43.96 and $74.7, respectively, and is currently trading below the average of its 52-week trading range. On the technical analysis front, the stock has a support level of ~$53.65 and a resistance level of ~$65.68. We have valued the stock using the P/E multiple based illustrative relative valuation method and arrived at a target price of an upside of low double-digit (in percentage terms). We believe the company can trade at slight discount to its peer average, considering its high debt burden, lower than peer average margins, higher expenditure, and regulatory and legislative pressures. We have taken peers like CSG Humana Inc (NYSE: HUM), Molina Healthcare Inc (NYSE: MOH), to name few. Considering the company’s track record of delivering substantial cashflows, decent 3QFY20 performance, acquisition synergies, restructuring activities and encouraging outlook and valuation, we give a “Buy” recommendation on the stock at the current market price of $58.42, down by 2.8% on 27 January 2021.  

CNC Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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