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Centene: A Modestly Undervalued Growth Stock

Centene Corp. (NYSE:CNC) is a overall health insurance policies business that specializes in government-sponsored well being treatment packages. In addition to Medicaid and Medicare products and solutions, it provides professional packages and Market functions.

Buyers will see a quick-expanding and undervalued substantial cap. Based in St. Louis, it has a current market capitalization of $35.66 billion.

This is an overview of the firm from a presentation to the 38th Annual J.P. Morgan Healthcare Convention past January:

Management of the FPA Cash Fund wrote in a commentary previous January, “Centene has been very effective in winning contracts and expanding revenues. Their achievements is because of to their massive investments in units, robust harmony sheet, and prudent capital allocation.”

That system has paid off in the earlier three several years, the income development charge has averaged 12.8%, the Ebitda progress price has averaged 10.2% and the earnings for every share without the need of NRI development fee has averaged 22.5%.

Cost-free income movement also has been on an upward trajectory, despite the fact that quite a bumpy a single, more than the previous 6 many years:

Centene free cash flow chart

Since Centene does not fork out a dividend and has not acquired back shares in the past a few years, that’s designed fairly a little bit of free of charge funds flow available for expansion and acquisitions. The most noteworthy initiative in current yrs was its buy of WellCare Overall health Plans Inc.

The $19.6 billion acquisition, finished in January of this year, is envisioned to deliver a number of benefits, the additional crucial currently being the means to insert a Medicare prescription drug approach to its present small business strains. In its 3rd-quarter earnings get in touch with, Centene reported it predicted it would “generate the mid- to upper single-digit accretion from the transaction” it formerly projected.

That would be on leading of the by now strong advancement in profits, Ebitda and earnings for every share we mentioned above. Centene mentioned what it perceived as its competitive strengths in its 10-K:

  • Experience in governing administration-sponsored courses.
  • Good quality and innovation.
  • Innovative technologies and scalable programs.
  • Money power and scale.
  • Diversified company traces.
  • Localized strategy with centralized assistance infrastructure (in working with health care suppliers).

Price investors really should be aware the firm has a significant credit card debt load, with a funds-to-debt ratio of .76 and desire coverage of 5.14. The latter is at the bottom finish of acceptability for followers of Benjamin Graham.

Total, an ambitious management crew has created Centene a speedy-escalating, good quality company. But is its inventory cost-effective?

Several valuation steps reveal it is, though maybe not a great deal. The GuruFocus Price chart agrees with that assessment:

Centene GuruFocus Value chart

Centene’s price-earnings ratio of 17.14 is ideal in the middle of all organizations in the health care options sector and properly below its 10-calendar year median of 21.16.

In the same way, when we search at the value-earnings ratio in the context of Ebitda growth, we also get a modestly undervalued score. Which is the PEG ratio (value-earnings divided by five-calendar year Ebitda advancement), which comes in at .82 (where by 1.00 equals truthful worth).

And due to the fact Centene has a high predictability rating, 4.5 out of 5 stars, we can have some self esteem in the discounted dollars move calculation (working with default settings):

Centene discounted cash flow analysis

Based mostly on the relative consistency of these metrics, we could presume that Centene is modestly undervalued at existing cost stages.

What about its level of competition? There is a ton of it, coming from numerous sources, as explained in the 10-K:

“We contend for customers principally on the foundation of dimensions and good quality of company networks, gains furnished and quality of services. We contend with various varieties of competitors, which include other wellness plans and conventional point out Medicaid packages that reimburse companies as care is presented, as nicely as technology businesses, new joint ventures, money solutions companies, consulting companies and other non-regular rivals.”

Below are some of the most important, as revealed on Centene’s summary webpage at GuruFocus:

Centene competition

Of this group, four are even larger by sector capitalization:

As the company noted, competition is centered on the measurement and excellent of supplier networks, so Centene faces headwinds in expanding its industrial business enterprise.

However, it has dimensions and know-how strengths when competing in govt marketplaces, so we might have at least some confidence that the firm can keep its previously mentioned-common advancement costs.

The gurus have been equally shopping for and offering Centene shares, but acquiring has been markedly lower considering that the conclusion of the initial quarter of this yr (when the WellCare acquisition was done):

Centene guru buys and sells

The a few major holders, among the 12 gurus with stakes in Centene, at the conclude of the third quarter were being:

  • Andreas Halvorsen (Trades, Portfolio) of Viking World wide Investors with 17,445,560 shares, symbolizing 3.01% of Centene’s exceptional stock and 3.68% of his fund’s capital. He increased his share rely by 8.31% in the quarter.
  • The Vanguard Wellness Treatment Fund (Trades, Portfolio), which picked up a further 1.18% in shares to close the quarter with 9,573,772 shares.
  • Pioneer Investments (Trades, Portfolio), which made a bigger commitment, growing its share depend by 72.45% to 1,950,506 shares by Sept. 30.

FPA Funds owned only 165,984 shares, immediately after an boost of 12.47%, but has designed a significant determination with 9.06% of its total belongings managed invested in Centene.


The large determination by FPA Funds appears justified centered on what we see in Centene’s financials and valuation metrics. All 4 valuation metrics we reviewed ended up reliable in indicating at the very least modest undervaluation. More aggressive buyers could place extra fat on the DCF valuation that implies there is a sizeable margin of basic safety.

The development tale is also strong, with above-normal growth in profits, Ebitda and earnings for each share about the past decade. It also has an earlier mentioned-ordinary metric in its personal debt load, as calculated by its interest protection ratio. On top of that, the WellCare acquisition must support Centene continue on that growth, alongside with its confirmed strategy for natural expansion.

Benefit traders will want to tread warily listed here for the reason that of the personal debt, but may possibly find the share value interesting. Advancement investors may possibly like the 10-year advancement rate and entry value. Profits traders will go Centene by due to the fact it does not spend a dividend.

Disclosure: I do not have shares in any of the firms named in this posting and do expect to purchase any in the up coming 72 several hours.

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About the writer:

Robert Abbott

Robert F. Abbott has been investing his family’s accounts because 1995 and in 2010 included selections — largely protected phone calls and collars with prolonged shares.

He is a freelance writer, and his initiatives involve a web site that gives info for new and intermediate-amount mutual fund traders (whatisamutualfund.com).

As a author and publisher, Abbott also explores how the middle course has come to individual big business enterprise through pension resources and mutual funds, what management expert Peter Drucker referred to as the “unseen revolution.”

Go to Robert Abbott’s Internet site