Centene Continues to Capitalize on Obamacare and So Will You

NEW YORK (TheStreet) -- Centene (CNC) is in the health care sweetspot thanks to being part of one of the leading industry groups this year, health care providers.

Centene shares, at $80, are up 35% for the year to date.

Concerns about the launch of the Affordable Care Act, aka Obamacare, sent these stocks into a tailspin at first, but most of these stocks have since regained ground over the last few months as investors realize the growth potential.

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There continues to be conflicting court rulings surrounding the legality of Obamacare subsidies, but in the absence of a U.S. Supreme Court decision, the provider stocks appear to be shrugging off these lower court rulings.


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Centene provides programs and related services to address the needs of the under-insured and uninsured individuals. It offers Medicaid and Medicaid-related coverage to individuals through government subsidized programs and operates in 21 states.

As a result of the Affordable Care Act, an additional six million Americans have enrolled in Medicaid and related health programs for the poor through the end of April. More people are now eligible for state Medicaid programs and many of these states are expanding their programs and contracting with private health insurance companies like Molina (MOH), Health Net (HNT) and Centene. Medicaid is now a growth story and these companies are the beneficiaries.

Earnings Results

On Tuesday, Centene reported strong second-quarter earnings results of 95 cents vs. the consensus of 72 cents. Revenue of $3.74 billion also beat the consensus estimate of $3.65 billion. The company guided up this year's earnings to a range of $3.70-$3.90 vs. prior guidance of $3.60-$3.90 and the consensus of $3.73.

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This quarter's premium and service revenues blew past expectations due to strong membership growth and expansion in California, Massachusetts, Ohio, and Washington. The company's higher annual guidance was based on this quarter's strong results, new business awards in Illinois and Mississippi, and two recently completed acquisitions.

The stock traded up on the results and pushed several analysts to raise their price targets as the stock broke out to a new 52-week high.

Prior to reporting its earnings results, Centene's stock price had also been rising on speculation that Ascension Health might be interested in acquiring the company.

But I am not focused on M&A speculation, but rather on the growth prospects for the Medicaid segment of the market.

Centene's management team has been delivering performance for a long time. The company has more than two decades of experience and expertise with Medicaid. As seen below, the stock has consistently delivered returns in excess of the market over a three-, five- and 10-year period and earns a performance grade of A-.

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On a valuation basis, Centene is trading at only 16.5 times earnings and given its expected annual growth rate of 24.5%, has a PEG ratio of only 0.68. This gives it a reasonable valuation given its growth profile.

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Overall, this mid-capitalization stock of $4.4 billion receives the rank of 84th in my 3,800+ stock universe, receiving a stock grade of A-.

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The health care sector, and specifically Healthcare Providers (IHF), have been strong performers this year, up 13.5% year to date.


Health care providers currently rank a B+ among the 60 sectors I track on a daily basis.

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As demonstrated by its latest earnings results, Centene remains one of the key beneficiaries of the Affordable Health Act.

Kaiser estimates that as many as one milion Medicaid applications nationwide have yet to be processed, so membership growth should continue to increase in the third quarter. Within Texas, Centene's largest market, approximately 875,000 Texans that qualify for Medicaid have not signed up yet.

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Given these positive trends and past execution, Centene remains a perfect example of a Best Stock for Now.

At the time of publication the author was long CNC, although positions may change at any time.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

TheStreet Ratings team rates CENTENE CORP as a Buy with a ratings score of B+. TheStreet Ratings Team has this to say about their recommendation:

"We rate CENTENE CORP (CNC) a BUY. This is driven by several positive factors, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its robust revenue growth, solid stock price performance, impressive record of earnings per share growth, compelling growth in net income and good cash flow from operations. We feel these strengths outweigh the fact that the company shows low profit margins."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth came in higher than the industry average of 15.7%. Since the same quarter one year prior, revenues rose by 37.0%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • Powered by its strong earnings growth of 39.02% and other important driving factors, this stock has surged by 41.47% over the past year, outperforming the rise in the S&P 500 Index during the same period. Regarding the stock's future course, although almost any stock can fall in a broad market decline, CNC should continue to move higher despite the fact that it has already enjoyed a very nice gain in the past year.
  • CENTENE CORP has improved earnings per share by 39.0% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, CENTENE CORP increased its bottom line by earning $2.85 versus $0.01 in the prior year. This year, the market expects an improvement in earnings ($3.72 versus $2.85).
  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Health Care Providers & Services industry. The net income increased by 43.4% when compared to the same quarter one year prior, rising from $23.00 million to $32.98 million.
  • Net operating cash flow has significantly increased by 487.17% to $252.45 million when compared to the same quarter last year. In addition, CENTENE CORP has also vastly surpassed the industry average cash flow growth rate of 18.53%.

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