Centene- A 5-Star Buy In Healthcare Management

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Centene Corporation (CNC) carries CFRA's highest investment recommendation of 5-stars, or Strong Buy. 

With its history of value-added acquisitions, strategic cost containment investments, and a favorable environment for Medicaid insurers, we think CNC will produce EPS growth above the peer average in the years ahead.

Centene provides health plans and related health care management services with a focus on under-insured and uninsured individuals. The company's largest membership populations are government-sponsored programs, particularly Medicaid, which generated 53% of CNC's medical membership and 67% of operating revenue in 2020.

CNC also offers private individual and small business health insurance, primarily through the Health Insurance Marketplaces (10% of membership, 15% of operating revenue).

CFRA thinks Centene continues to be well positioned for solid growth with its recent acquisitions. In January 2020, CNC acquired Medicaid competitor WellCare.

The transaction made CNC the fourth largest health plan provider in the U.S., with 2020 revenue of $111 billion, and by far the largest Medicaid insurer with 13.6 million members, 1.5x the Medicaid membership of second place Anthem (ANTM).

In addition, CNC recently announced two strategic acquisitions: pharmacy chain PANTHERx, specializing in orphan drugs and rare diseases (December 2020), and Magellan Health (January 2021), which will considerably increase CNC's behavioral health capabilities.

CFRA thinks the Magellan acquisition will create one of the largest behavioral health platforms in the U.S. The acquisition is expected to bring 5.5 million new members on government-sponsored plans, 2 million pharmacy benefit manager (PBM) members, and 16 million medical pharmacy members, significantly increasing Centene's scale and reach, in our view.

CNC has a successful track record of expanding membership both organically and through M&A. In 2016, CNC acquired Health Net, which more than doubled total membership and led to annual EPS gains of over 30% for two years.

Following the Health Net integration success, in 2018, CNC acquired New York-based Medicaid insurer, Fidelis Care. This acquisition increased CNC's Medicaid membership by about 21% and drove EPS growth of 30% in its first full year.

These successful integrations give us confidence that the WellCare and Magellan Health acquisitions will also produce strong EPS growth for CNC shareholders in the long run.

CNC's annual operating revenue, driven by acquisitions and expansion into new states, grew to $111.1 billion in 2020, up from $48.4 billion in 2017, at a compound annual growth rate (CAGR) of 32%. For the same period, adjusted income per share grew to $5.00 from $2.52 in 2017, at an eye-catching CAGR of 26%.

CNC's total membership grew to a record 25.2 million in 2020 from 11.4 million in 2016, at a remarkable CAGR of 30% due mainly to the additions from the WellCare acquisition.

While we acknowledge that Q1 earnings will be impacted by increased medical costs resulting from the normalization of medical utilization levels and increased Covid-19-related costs, we are confident that 2021 EPS growth will be strong.

We expect the top and bottom-line results to be boosted by additional contributions from recent acquisitions, particularly from the Magellan acquisition, which are currently not included in our estimates as the transaction has not closed yet but is expected to be finalized in the second half of 2021.

Our twelve-month target price is $73, 12.3x our 2022 EPS estimate, below CNC's historical forward P/E average of 15.3x due to integration risks stemming from the recent acquisitions.

Risks to our rating and target price include cuts to government health care budgets and continued sharp rises in medical costs due to Covid-19.

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