Company Reports

Narrow-moat Centene exceeded expectations in the first quarter, including strength in its relatively high-margin individual plans, and the company raised its guidance for the full year. However, our bottom-line expectations were already in line with management's new outlook, and after making mild tweaks to our near-term assumptions, our $92 fair value estimate has not changed materially. Centene shares remain moderately undervalued.

In an unusual development, the Centers for Medicare & Medicaid Services released its final Medicare Advantage, or MA, rate notice that matched its initial rate notice, instead of rising. In this final rate notice, the overall increase in MA revenue to insurers remained lower than the risk score trend, which is likely to pressure MA benefits, pricing, and/or insurer profits in 2025. We are reducing our fair value estimate on Humana by 5% on this disappointing development, given its focus on MA and our expectation that its previous profit goal in 2025 and potential growth in subsequent years may be constrained. However, we are not changing our fair value estimates on the other more diverse managed care organizations, or MCOs, that we cover, and market price declines on this news may create more attractive investment opportunities for investors with a long-term investment horizon. Currently, Humana, CVS, and Centene remain the most attractive MCOs on a price/fair value basis.

Narrow-moat Centene turned in solid fourth-quarter results that allowed it to slightly exceed management's expectations on the bottom line in 2024 for at least $6.60 of adjusted EPS (actual was $6.68). Management also maintained its previous 2024 guidance of at least $6.70 in adjusted EPS, despite rising medical utilization that pushed its medical cost ratio up to the high end of its target range in 2023 and despite ongoing Medicaid and Medicare Advantage challenges. Overall, we are maintaining our $92 fair value estimate and continue to view Centene shares as moderately undervalued.

Narrow-moat Centene reiterated its long-term goals at its annual investor day. Most of these goals appear in line with our current expectations. However, we are raising our fair value estimate to $92 per share from $87 previously to reflect cash flows generated since we last changed our fair value estimate about a year ago.

Centene aims to be a top provider of government-sponsored health plans. Although it has grown at a solid clip organically, the company also has made significant acquisitions—most notably WellCare in Medicare Advantage plans—to meet that goal. Technology investments to boost efficiency have helped Centene prosper in this relatively low-margin managed-care sector, as well.

Narrow-moat Centene turned in strong third-quarter results even as Medicaid redeterminations continued. With the expansion of its individual exchange business more than offsetting Medicaid declines, management moderately increased its 2023 outlook and maintained its 2024 guidance. At first glance, these goals appear to be in line with our expectations, and we are maintaining our $87 fair value estimate. Centene shares remain moderately undervalued, in our view.

In advance of the Medicare open enrollment period that starts on Oct. 15, the Centers for Medicare & Medicaid Services, or CMS, released its star ratings that measure the performance of the Medicare Advantage, or MA, plans offered by private insurers. At first glance, we do not anticipate changing our fair value estimates for any managed-care organization, or MCO, based on this new data. However, even as overall MA star ratings largely stabilized after a big drop last year, there were some clear winners and losers in this year's scoring that could affect market sentiment for MCO shares.

Near-term uncertainty is creating an opportunity for long-term investors in the managed-care organization segment. Of the six narrow-moat MCO stocks that we cover—Centene, Cigna, CVS Health, Elevance, Humana, and UnitedHealth—five are trading in undervalued territory, and even the typically premium-priced UnitedHealth looks reasonably valued to us.

Centene aims to be a top provider of government-sponsored health plans. Although it has grown at a solid clip organically, the company also has made significant acquisitions—most notably WellCare in Medicare Advantage plans—to meet that goal. Technology investments to boost efficiency have helped Centene prosper in this relatively low-margin managed-care sector, as well.

Blue Shield of California announced that it was dropping CVS Health for its nonspecialty pharmacy benefit management services in favor of a coalition of providers, including Amazon and the Mark Cuban Cost Plus Drug Company. While these organizations have been making noise as potential PBM entrants for a while, this contract win looks like the first one with any real teeth, in our opinion, and could signal the start of a change in the PBM competitive landscape, particularly for top-tier players CVS, Cigna, and UnitedHealth. We do not expect to change our narrow moat ratings on these MCOs because of this announcement, though.

Narrow-moat Centene turned in strong second-quarter results, even as Medicaid redeterminations began. With the expansion of its individual exchange business and ongoing cost controls, management increased its 2023 outlook and maintained 2024 guidance. We are keeping our $87 fair value estimate intact and continue to view shares as moderately undervalued, especially after July 28's mid-single-digit percentage decline.

Narrow-moat Centene turned in strong first-quarter results, and the company increased its guidance for the full year. However, given emerging headwinds primarily in Medicaid and Medicare Advantage, management reduced its expectations for 2024 before reiterating its long-term guidance for 12% to 15% growth on that reduced 2024 EPS base. Despite the emerging 2024 headwinds, we do not anticipate changing our $87 fair value estimate, which is based on much longer-term assumptions that haven't changed materially.

Narrow-moat Centene turned in strong fourth-quarter results that allowed the company to exceed our adjusted EPS and cash flow expectations for the full year. Management also maintained its bottom-line expectations for 2023, which remain roughly in line with our estimates. At first glance, we do not anticipate changing our $87 fair value estimate materially. Centene shares appear moderately undervalued to us.

In a positive turn of events, narrow-moat Centene succeeded in its protest to serve Medicaid members in key California counties, including Los Angeles and Sacramento. The firm may have to share those counties with other winners, though, like half of Los Angeles county with Molina. Considering some of those details, our fair value estimate has not changed materially. However, overall, we see this as a positive development that could mildly improve the firm's near-term earnings prospects. For example, management highlighted that the floor on its new 2024 earnings target is now $7.15 per share versus $7 when considering this development.

Centene aims to be the top provider of government-sponsored health plans. Although it has grown at a solid clip organically, the company also has made significant acquisitions—most notably WellCare—to meet that goal. Technology investments to boost efficiency have helped Centene prosper in this relatively low-margin managed-care sector, as well.

The Department of Defense announced its Tricare contract awards for military service members, retirees, and their families, and while Centene has not commented yet, the company appears to have lost out to a competitor in the West region. At first glance, we are cutting our fair value estimate by a high-single digit percentage on this loss, which comes on top of recent county losses in California's Medicaid market to another competitor. While we do not think Centene has lost its narrow economic moat, these mounting contract losses suggest that the company will probably not reach its previously stated 2024 earnings goal.

Centene aims to be the top provider of government-sponsored health plans. Although it has grown at a solid clip organically, the company also has made significant acquisitions—most notably WellCare—to meet that goal. Technology investments to boost efficiency have helped Centene prosper in this relatively low-margin managed-care sector, as well.

Narrow-moat Centene maintained its 2022 outlook and revealed its initial guidance for 2023 that appears to be in line with our bottom-line expectations. After this announcement, we are maintaining our $95 fair value estimate. With the shares trading at just 13 times 2023 expected earnings, we view Centene as moderately undervalued, especially considering its new long-term earnings growth goal of 12%-15%, which roughly matches our intermediate-term view. That new earnings growth target also puts Centene in the mix with top-tier managed-care companies like UnitedHealth (13%-16% long-term earnings growth goal), Elevance Health (12%-15%), and Humana (11%-15%) in terms of growth prospects, which would be impressive if achieved.

Narrow-moat Centene turned in solid third-quarter results, including strong performance in its key end markets—Medicaid (low-income Americans) and Medicare Advantage (older Americans)—which allowed management to slightly increase the bottom end of its 2022 EPS outlook. Also, on the call, management gave a preview of its 2023 and 2024 profit goals, which are roughly in line with our estimates. Considering that solid outlook, we are maintaining our $95 fair value estimate.

Centene aims to be the top provider of government-sponsored health plans. Although it has grown at a solid clip organically, Centene also has made significant acquisitions--most notably the 2020 WellCare merger--to meet that goal. Technology investments to boost efficiency have helped Centene prosper in this relatively low-margin managed care sector, as well.