Centene ($CNC)

Centene ($CNC): Why This Healthcare Giant Could Be One of the Best Value Plays Right Now

Centene might not be grabbing headlines these days, but it’s a massive player in healthcare, managing government-sponsored health plans for more than 28 million Americans. We’re talking Medicaid, Medicare Advantage, Obamacare marketplaces, plus military and correctional healthcare. Despite the recent rough patch with its stock price dropping around 70% from its highs, the business itself is still solid and trading at some of its lowest valuations in years.

What’s Going On With The Stock?

Sure, Centene’s taken a hit after cutting its 2024 earnings outlook. The main culprit? Some temporary issues with Medicaid redeterminations and ACA plan pricing that didn’t go as expected. Basically, new government rules meant they lost a bunch of healthier ACA customers, which made the pool of insured folks sicker and drove costs up.

This kind of risk adjustment shake-up has hit other insurers too, so Centene isn’t alone here. Plus, Medicaid enrollment jumped during COVID but now is going back to more normal levels — which is causing some cost increases. But here’s the important part: Medicaid rates have to reflect real costs, so states will adjust payments to insurers like Centene to keep things sustainable.

Why The Long-Term Story Still Looks Good

Medicaid is the backbone of Centene’s business. They cover over 13 million people and pull in $80 billion+ in revenue here, with about a 20% market share. As the Medicaid system “unwinds” from the pandemic effects, Centene expects margins to get back to where they were before, which is good news.

The ACA marketplace is a smaller piece of the pie — about 20% of revenue — but it’s been a big profit contributor in the past. Centene’s strong presence in states like Florida, Texas, and Georgia means they have flexibility to raise prices and manage risk pools better going forward.

On top of that, new healthcare trends like employers using Individual Coverage Health Reimbursement Arrangements (ICHRA) could expand the ACA market to millions more people. Medicare Advantage and Prescription Drug Plans are also growing steadily thanks to an aging population, giving Centene more solid growth opportunities.

Financially Strong and Efficient

Centene runs a lean operation compared to its peers, keeping costs below industry averages. Over the past decade, it’s generated solid returns for shareholders. It also has over $15 billion in cash, which is a strong cushion during uncertain times.

What Could Spark a Comeback?

If Medicaid medical loss ratios improve to more normal levels — even slightly above historical averages — Centene could add more than $2 billion to its gross margins. That bump alone could add roughly $1.60 to $2.00 to earnings per share, which would offset the recent ACA headwinds.

Looking further out, analysts see Centene’s earnings per share possibly exceeding $6 by 2027. That means the stock could easily double at current prices just from the company getting back to normal earnings levels. And with improvements in Medicare Advantage and Prescription Drug Plan margins, the upside could be even bigger — some estimates put potential EPS over $10 in the years ahead.

Bottom Line

Centene is a giant in government healthcare with a track record of navigating regulatory changes. While the stock has struggled recently due to temporary issues, the company’s core business remains strong. Its valuation is low compared to its history and peers, which makes it look like a compelling value opportunity.

If Medicaid margins rebound and ACA reforms settle down, Centene could see solid earnings growth and a meaningful rally in its share price over the next few years.

Disclosure: This is just an informational piece, not financial advice. It’s not a recommendation to buy or sell. Always do your own homework and talk to a financial advisor before making investment decisions. Investing in healthcare companies involves risks, including the loss of principal.