Centene Earnings: Medicaid Redeterminations Begin About as Expected and 2023 Outlook Increases

Narrow-moat Centene CNC 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.

The top Medicaid and individual exchange insurer started feeling opposite effects in those businesses this quarter. Specifically, its Medicaid membership declined 2% sequentially (up 4% year over year), as redetermination activities began in early April. However, management highlighted that the disenrollment process had been progressing about as expected, which was good to hear after early reports that states were being overzealous with disenrolling people who may still qualify for the program. Additionally, the firm’s individual exchange business (62% year over year membership growth) appeared robust, given increased subsidies after recent legislation, and that business in particular could act as a safety net for individuals pushed off of Medicaid as redeterminations continue. Overall, in the quarter, revenue grew 5%, and with internal initiatives (like improving gross margins through bid discipline, reducing SG&A 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 over 18%.

Considering these trends, management mildly increased its 2023 guidance and maintained its 2024 outlook. Centene increased its adjusted EPS guidance by $0.05 to at least $6.45 (or at least 12% growth), and management kept its 2024 EPS guidance of at least $6.60 intact, reflecting ongoing Medicaid redeterminations and potential weakness in its Medicare Advantage business. We plan to roughly maintain our near-term assumptions, which are near management’s guidance.