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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.

Centene delivered another strong quarter and outlook on February 6 and analysts responded by raising 2018 full-year earnings estimates 21% from $5.86 to $7.09. The 2019 consensus also vaulted 23% from $6.63 to $8.17.

And this followed the solid company news just a few months ago. Here's what I wrote on December 19...

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...

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 told investors in a research note.

James also 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 Again on Anticipated Deal Closing

At the December 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 saw 2018 revenue of $60.0 to $60.8 billion, vs the consensus of $54.95 billion.

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

More than three months later, the deal has still not closed. But it looks like the company update in February solidified those expanded views of new revenues and synergies and firmer estimate revisions have finally started to roll in anyway on high confidence the deal does get done. More details below.

Doubts About Fidelis Acquisition

On March 26, the New York Archdiocese threatened to terminate Centene's $3.75 billion acquisition of Fidelis, according to a story in Politico. Cardinal Timothy Dolan said the Roman Catholic Archdiocese of New York is willing to walk away from a $3.75B deal with the for-profit insurer Centene and continue operating Fidelis as a nonprofit insurer if Governor Andrew Cuomo does not back off his plan to capture most of the proceeds for the state, said the report.

In response, Centene analysts at BMO Capital issued a research update noting that weakness in CNC shares was a buying opportunity. According to financial news website, BMO Capital analyst Matthew Borsch said he would not overreact to a Politico report that Centene's pending acquisition of Fidelis health plan is in jeopardy due to a fight between the Archdiocese of New York and Governor Cuomo.

The dispute may impact the deal timing, but both parties have more to gain than lose and he suspects the deal is still substantially more likely than not to get done, Borsch tells investors. The analyst, who said he would be a buyer on any weakness, keeps an Outperform rating on Centene, which he identifies as his favorite name in Managed Care.

On April 2, Cantor Fitzgerald analysts reiterated their Buy rating and $125 price target on CNC shares.

And on April 4, Piper Jaffray analyst Sarah James updated her CNC model to reflect the slight delay in the closing of the Fidelis acquisition, which she estimated is only a $0.02 headwind to EPS for every month that the closing is delayed. She reiterated her $134 price target based on 16.2x her 2019E EPS of $8.25, which was raised from $8.02.

ACA Reform Concerns Subside

To be fair, some analysts and investors 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 CNC shares have absorbed another quarter of those concerns and now the stock is rallying above $107 to new 9-week highs after finding strong support at $100.

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

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 in a society pushing the upper norms of life expectancy.

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

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