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Bull of the Day: Centene (CNC)

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Centene (CNC - Free Report) is one of the largest managed care providers in the US, serving over 12 million people in 14 states.

In addition to being the largest Medicaid Managed Care Organization in the country, Centene is also the largest carrier on the Health Insurance Marketplace and a national leader in managed long-term services and supports.

The company held its annual Investor Day on December 15 and several analysts came away increasingly bullish on the stock. Here's was the word from investment bank Piper Jaffray where their price target on CNC was boosted from $112 to $134 (courtesy of TheFly.com)...

Piper Jaffray analyst Sarah James raised her price target for Centene to $134 saying the company's investor day "did not disappoint with a material guidance boost." Despite rallying 68% year-to-date, Centene is still the best buying opportunity in the group with potential for earnings upside and multiple expansion "once the market moves past the worst case scenario on reform," James tells investors in a research note. The analyst sees large scale reform as unlikely and the impact of block grants, which she views as likely, as being a "significant positive" for Centene and managed Medicaid.

Guidance Raised

At the event, Centene provided a 2018 outlook with adjusted EPS of $5.47 to $5.87, vs a Wall Street consensus $5.50 to $5.55.  The company sees 2018 revenue of $60.0 to $60.8 billion, vs the consensus of $54.95 billion.

Management also provided an update on their recent $3.75 billion acquisition of Fidelis Care which gave the company significant new exposure to the New York market. Since the deal has not yet closed, analysts must speculate on the impact of new revenues and synergies.

As it stands, if the Fidelis acquisition closing date and related financing would have been assumed to be January 1, 2018, both the top and bottom end of the adjusted EPS guidance ranges would increase by 23c per diluted share, respectively. Additionally, the top and bottom end of the total revenue guidance range would increase by approximately $2.8 billion.

Based on this outlook, as of December 18  the Zacks Consensus EPS for 2018 climbed from $5.49 to $5.62. This has moved Centene to a Zacks #2 Rank, but more upward estimate revisions could be in the pipe.

Here's a look at the steady growth long-term investors have come to know and love from Centene. This is the proprietary Zacks Price & Consensus chart which plots a company's stock price against annual earnings estimates.



Clearly, Centene is benefiting from secular demographic trends and this is why I have owned it since the inception of my Healthcare Innovators portfolio earlier this year. It exemplifies one of my "4 Megatrends" of healthcare, namely an aging population, living longer and needing more advanced care.

ACA Reform Concerns Subside

To be fair, some analysts are still concerned about potential surprises from any changes to the current Affordable Care Act structure, which Centene benefits from in terms of predictable reimbursements from Medicare and Medicaid.

But that uncertainty largely subsided for several banks after the company presentation. Analysts from both Cantor Fitzgerald and Jefferies raised their price targets to $115, while Bank of America strategists ratcheted theirs up to $118.

And Wells Fargo analysts moved CNC up to their Priority List, citing "We believe shares of CNC should outperform based on their current valuation which seems low to us given the company's growth compared to its managed care peers." They maintained a $120 PT from October.

Bottom line: Centene is not a medical or pharma stock with new discoveries around the corner. But it provides essential care to those who need it most and for this reason it will be a steady grower amidst an aging population living longer and pushing the upper limits of life expectancy.

Disclosure: I own CNC shares for the Zacks Healthcare Innovators portfolio.

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