Centene Earnings: 2023 Outlook Raised as Individual Expansion Offsets Medicaid Redeterminations

Narrow-moat Centene CNC 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.

As the top Medicaid and individual exchange insurer, Centene continued to feel opposite effects in those businesses this quarter. Its Medicaid membership declined 3% year over year after redetermination activities to determine each member’s qualification resumed in early April. While states are being somewhat overzealous with disenrolling people for procedural reasons who may still qualify for the program, Centene’s safety net—the individual exchanges—continued to grow at a fast pace, with 76% year-over-year membership growth more than offsetting the Medicaid decline. Overall, medical membership grew 4%, and revenue grew 6%. Thanks to internal initiatives—like improving gross margins through bid discipline, reducing selling, general, and administrative expenses as a percentage of sales by centralizing and automating certain functions, and rationing real estate—along with share repurchases, Centene’s adjusted EPS grew 54% year over year.

Considering these trends, management increased its 2023 guidance and maintained its 2024 outlook. Centene raised its adjusted EPS guidance by $0.15 to at least $6.60 (or at least 14% growth) and kept intact its 2024 EPS guidance floor of at least $6.60, which looks likely to be constrained by ongoing Medicaid redeterminations and potential weakness in its Medicare Advantage business. We plan to roughly maintain our near-term assumptions, which remain near management’s guidance.