Is Centene Stock A Buy?

Centene Corp (NYSE:CNC) is a managed care company and largest Medicaid provider in the country. Its focus is on physical and mental care through its pharmacy, behavioral health, and specialty care units.

It also supports Tricare and traditional insurance companies, making it a foundational health network during the pandemic, so is Centene stock a Buy?

Medical insurance is an important factor in our lives, especially as we get older. Still, an estimated 8.5 percent of people (about 27.5 million) were uninsured as of the 2018 U.S. Census. This number only got worse as 22 million people lost their jobs during the ensuing shutdowns.

Business is so good, the company spent $2.2 billion to acquire Magellan Health at the start of 2021. This creates one of the largest behavioral health platforms in the country at over 41 million unique members. It also expands its reach in other revenue streams.

Time to check Centene’s temperature to determine if it’s a hot stock for investors?

Centene Has The Confidence Of A Billionaire Titan

Centene is a Fortune 500 healthcare company that’s also a component of the S&P 500. It’s a managed care company that acts as a provider network to create cheaper insurance plans.

It does this through buying policies in bulk to negotiate cheaper rates. Centene manages this through a series of subsidiaries that have a health maintenance organization (HMO), preferred provider organization (PPO), and more.

The company’s main lines are Medicaid, Medicare, Tricare, the ACA health insurance marketplace, and traditional commercial health insurance companies. Its specialty companies include Centurion, Health Net, WellCare, and Envolve PeopleCare.

Because it’s so engrained in the healthcare system, billionaire hedge fund manager Ole Andreas Halvorsen listed it as one of his top 5 stock picks for the 2020s. But is it a good investment for everyone else?

Is Centene Stock A Buy?

Applying a standard financial analysis to Centene Corp that includes modeling out cash flows into the future and discounting them leads to an intrinsic value of $81.78 per share.

In the third quarter of 2020, the company reported $29.1 billion in revenues. That’s 53 percent year-over-year growth from the same quarter in the prior year.

And it has a health benefits ratio of 86.4 percent. This means it spends most its healthcare premiums on healthcare services.

Its GAAP earnings per share for that quarter was $0.97, based on 25.2 million managed care members. CNC operating cash flow was -$952 million for the quarter but plus $2.5 billion for the first nine months of the year.

Still, it holds over $25.7 billion in cash and cash equivalents to provide liquidity for its operations. This is going to come in handy as it deals with sliding Obamacare enrollments in 2021. And it dealt with a high level of crime in its St. Louis facilities.

By October 2020, it issued $2.2 billion in senior notes due in 2030. Net proceeds were used to rollover its higher-interest senior notes due in 2022.

This highlights the potential risks of investing in Centene. While it’s an important healthcare business, it’s not immune to economic conditions.

Centene Has Lots Of Debt & Lots Of Cash

Centene’s biggest problem is its debt load. The company carried a burdensome debt load of $16.7 billion by the end of June. That’s an increase of $7.02 billion in one year, although it does have cash on hand to help cover it.

In fact, the company had $21.9 billion due within the next year, and the debt offering in October only extended about 10 percent of that. Extensions don’t pay it off either – that debt remains a liability and costs the business interest.

This debt will reduce the potential profits going back to investors. Still, its debt to equity ratio of 0.65 means the company is keeping this debt in check relative to its size. Its growing revenues help take care of the debt faster. And its cash on hand is enough to keep this debt manageable.

Besides that, it also faces problems with the expanded unemployed population not being able to afford health insurance premiums. As the pandemic subsides over the years, it could find itself losing income as fewer people opt into insurance plans.

It also has competition for that smaller pool of possible people.

Centene Competitors: A Laundry List

Although it’s a large corporation, Centene still has big competitors. Humana (HUM), UnitedHealth Group (UNH), CVS Health/Aetna, and Express Scripts all have skin in the game. Each of these companies works feverishly to grow its user base, and they will undercut Centene in any way they can.

Humana alone is a $57 billion+ company that pulled in $56.9 billion in revenue in 2019. And the merger of CVA Health and Aetna is sure to make competition even more fierce, as Walgreens (WBA) got excluded from Aetna’s plans.

CVS has a wide retail footprint, and its Aetna acquisition could bring more people in. This convenience is a hard combo to beat, and Centene investors have reasons to worry.

Is Centene Stock a Buy? The Bottom Line

Centene Corp is a large managed healthcare company. It provides Medicare, Medicaid, Tricare, and more insurance policies to companies and other groups at a discounted wholesale rate.

This helped it gain a large user base that it relied on for revenues when lockdowns took effect.

But the world is changing, and healthcare changes with every White House administration.

Aetna’s merger with CVS (CVS) creates a vertically integrated healthcare business. It has a wide footprint, and its competition is bound to head the same direction.

In another 10 years, we could see retailers like Walmart and Amazon merging with managed care providers like Humana and Centene.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.