Company Overview: Centene Corporation (NYSE: CNC) is a well-diversified, multi-national healthcare company, which is engaged in offering a set of services to the government-sponsored healthcare programs. The company 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

Geographical Diversification and Synergies from Acquisitions are Key Catalysts: Centene Corporation (NYSE: CNC) is a well-diversified, multi-national healthcare company, which is engaged 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 has two operating segments namely Managed Care and Specialty Services. In 2019, the company reported total revenues of $74.6 million, up from $60.1 million reported in year-ago period. Revenues from Managed Care accounted for ~83.8% of total revenues in 2019 and provides health plan coverage to individuals through Government-subsidized programs. Revenues from Specialty Services represented the remaining 16.2% of total revenues and provides diversified healthcare services and products to state programs, healthcare organizations, employer groups and other commercial companies.

The company’s acquisition of WellCare Health leverages its position as the largest Medicaid managed care organization in the country. The combined entity now has 24 million members across 50 US States. The deal is expected to have long-term growth opportunities and cost-reduction benefits across markets and products. The merged entity will also benefit from leveraging Centene’s evolving position in the Health Insurance Marketplace to penetrate new territories. The move will aid both companies to remain committed to their specific community services where their members and employees live and work.

Through a diversified product portfolio and expanding geographic reach, the company remains on track to deliver its growth strategies, as well as growing its premium and service revenues profitably. 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 top-line growth of the business.

In the 2QFY20, both the revenues and earnings increased year over year. 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. Operational and technological improvements have been a differentiator and catalyst for Centene’s growth. The company remains focused on enabling and accelerating margin expansion through key operational investments. Notably, the company has recognized core growth drivers and remains well-positioned to capture larger shares of the ~$2 trillion addressable healthcare market.

Past Performance (Source: Company Reports)

2QFY20 Key Financial Highlights: During the quarter, the company reported adjusted earnings of $2.40 per share, which soared 79.1% from the prior corresponding period on the back of solid revenues. Total revenues during the quarter came in at $27.7 billion, up 51% 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.

Key Financial Highlight (Source: Company Reports)

Operational Update: The managed care membership stood at 24.6 million as of June 30, 2020 and increased 64% year over year. Health Benefit Ratio (HBR) for 2QFY20 came in at 82.1% lower than 86.7% reported in the year-ago period, due to the current COVID-19 pandemic situation. During the quarter, adjusted Selling, General & Administrative (SG&A) expense ratio as a percentage of revenues came in at 8.5%, down from 9% reported in the year-ago period. This year-over-year contraction of 50 basis points was due to WellCare buyout and leveraging of costs over higher revenues.

Balance Sheet and Cash Flow Update: The company exited the quarter with cash and cash equivalents of $12.8 billion, up from $12.1 billion reported as at 31 December 2019. Total assets stood at $68.3 billion as at 30 June 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, as compared to $13.6 billion reported as at 31 December 2019. Net cash provided by operating activities as of June 30, 2020 came in at $3.4 billion compared with net cash provided by operating activities of $2.3 billion reported in the year-ago period.

Cash Position (Source: Company Reports)

Recent Updates:

1. CNC Expands Partnership Ties With Quartet Health: On July 16, 2020, the company expanded its partnership ties with Quartet Health to help members easily access the behavioral health care they require. Both the companies initially served members only in Illinois and Louisiana, but, with the expansion of this partnership, they will be accommodating the entire nation. The company will also be offering virtual care facilities for members who need to access healthcare solutions from the comforts of their homes during the coronavirus led pandemic. The ongoing uncertainty provoked mental illness and behavioural issues. Favorable industry and legislative trends also prompted Centene to deepen its toes in the behavioral market.
2. CNC Inks Deal with NextLevel: On June 30, 2020, the company announced that its Illinois subsidiary, Meridian, has entered into a Member Transfer Agreement with NextLevel Health Partners, Inc. Per the deal, Meridian will be allocated 100% of NextLevel's ~54,000 members who gain access to benefits from the Illinois Department of Healthcare and Family Services' HealthChoice Illinois Program.

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 50.01% of the total shareholding. The Vanguard Group, Inc. and T. Rowe Price Associates, Inc. hold the maximum interests in the company at 11.36% and 8.79%, respectively.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Key Ratios Metrics: The Company reported Jun’20 EBITDA margin at 9%, higher than Jun’19 figure of 4.6%. Operating margin during Jun’20, stood at 7.3%, higher than Jun’19 figure of 3.5%. Net margin in the same time span stood at 4.3%, higher than Jun’19 figure of 2.7%. Jun’20 debt to equity ratio stood at 0.67x, which was in line with the industry median.

Key Metrics (Source: Refinitiv, Thomson Reuters)

Key Risks: The company 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. Further, the company is also exposed to risk associated with general global economic and market conditions, particularly those impacting the healthcare industry. Further, a dull performance by its dental and optical business remains a headwind. The company’s upcoming result is likely to see the Impact of cost waivers for COVID-19-related testing and treatment.  Further, adverse currency translations add to the woes.

Outlook: 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. Also, the company has ramped up efforts to contain the virus spread, by waiving certain “out-of-pocket” expenses for COVID-19 testing. The company also stands to leverage long-term growth opportunities from the increased access to telehealth, especially considering that the telehealth industry has been one of the few industries to have gained from the COVID-19 effect.

Further, growing knowledge and widespread social acceptance of mental health problems will offer health suppliers an opportunity to penetrate well into the market. The development in the social health industry is motivated by remote consulting and day care. New methods to mental health supervision programs and a positive supply-demand chain bode well for the behavioral healthcare market, which is expected to aid the company’s growth prospects.

For FY20, CNC now expects revenues to be between $109 billion-$111.4 billion. Adjusted EPS is expected to be in the range of $4.76 and $4.96, as compared to the prior guidance of $4.56-$4.76 per share.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology:  EV/EBITDA Multiple Based Relative Valuation (Illustrative)

EV/EBITDA Multiple Based Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The stock of CNC closed at $65.05 with a market capitalization of ~$37.7 billion. The stock made a 52-week low and high of $41.62 and $74.7 and is currently trading above the average of its 52-week trading range. The stock gave positive returns of ~29.12% and ~0.06% in the last one year and one month, respectively. Considering the above factors, we have valued the stock using EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price of an upside of lower double-digit (in % terms). For the purpose, we have taken peers like CSG Humana Inc (NYSE: HUM), Anthem Inc (NYSE: ANTM), Cigna Corp (NYSE: CI), to name few. Hence, we recommend a “Buy” rating on the stock at the closing price of $65.05, up 3.45% on 12 August 2020.

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

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