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Centene (CNC) Divests Unit to Boost Focus on Core Business

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Centene Corporation CNC recently completed the divestiture of its pharmacy business — PANTHERx, to the Vistria Group, General Atlantic, and Nautic Partners. Plans to divest the business were made in May 2022, and the transaction was anticipated to be completed within a span of two to four months, subject to applicable regulatory approvals and customary closing conditions. It is worth mentioning that the transaction has been closed within the targeted time period.

Despite PANTHERx being one of the rapidly growing specialty and rare U.S. pharmacies that Centene had acquired back in 2020, the healthcare provider decided to divest this business to intensify its focus on its core Managed Care business. It is through this business that CNC extends health coverage to individuals via government subsidized programs, including Medicaid, the State Children's Health Insurance Program (CHIP), Medicare-Medicaid Plans (MMP), Medicare (including Medicare Prescription Drug Plans) and the Health Insurance Marketplace.

Concurrent with the announcement of the PANTHERx divestiture deal in May, Centene inked a separate deal to sell the comprehensive pharmacy solutions organization Magellan Rx to Prime Therapeutics LLC. Magellan Rx was purchased by CNC when the managed care organization acquired the former’s parent company Magellan Health in January 2022. Subject to applicable regulatory approvals and customary closing conditions, the transaction is likely to close in the fourth quarter of 2022.

Coming back to the PANTHERx divestiture, the majority of the net proceeds received from the sale will be utilized for conducting share repurchases and the balance for repaying its mounting debt level. The proceeds of the Magellan Rx divestiture will also be utilized for the same. Roughly $2.8 billion of aggregate proceeds are anticipated to arise from two of these transactions. In the 12-month period following the closing of each transaction, the divestitures are likely to be neutral to somewhat accretive to the bottom line (adjusted earnings per share) of Centene.

As most of the divestiture sale proceeds are intended for the pursuit of share buybacks, management of Centene was prudent to authorize a $3 billion increase in its existing share repurchase program during June 2022. As of Mar 31, 2022, CNC had $800 million in leftover funds to repurchase shares. The increased authorization of $3 billion in June took the total authorization value to $3.8 billion. With share buybacks to the tune of $200 million during May 2022, management disclosed (when the authorization increase announcement was declared) that $3.6 billion remained under the share repurchase program. The healthcare provider has resorted to increasing the total share repurchase authorization from time to time, thereby reflecting its efforts to sustain solid capital deployment endeavors.

Plans to repay debts with the divestiture proceeds also seem to be well-timed ones. Centene grapples with a significant debt level ($18.6 billion as of Mar 31, 2022) that results in continuous interest expenses. This puts strain on CNC’s margins to some extent. Through debt repayments, the interest expenses of Centene might witness a downtrend and consequently drive its bottom-line growth in the days ahead. Also, the utilization of divestiture proceeds for reducing debt level will enable the managed care organization to utilize its existing cash reserves and robust cash-generating abilities to pursue growth-related initiatives.

Shares of Centene have gained 18% in a year compared with the industry’s rally of 15.9%. CNC currently carries a Zacks Rank #3 (Hold).

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Stocks to Consider

Some better-ranked stocks in the Medical space are ShockWave Medical, Inc. SWAV, Assertio Holdings, Inc. ASRT and Acadia Healthcare Company, Inc. ACHC. While ShockWave Medical flaunts a Zacks Rank #1 (Strong Buy), Assertio and Acadia Healthcare carry a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

ShockWave Medical’s earnings surpassed estimates in each of the last four quarters, the average surprise being 189.99%. The Zacks Consensus Estimate for SWAV’s 2022 earnings is pegged at $2.02 per share, which compares favorably with a loss of 26 cents reported in the year-ago period. The consensus mark for ShockWave Medical’s 2022 earnings has moved north by 9.8% in the past 30 days.

Assertio has a trailing four-quarter earnings surprise of 26.39%, on average. The Zacks Consensus Estimate for ASRT’s 2022 earnings is pegged at 40 cents per share, which compares favorably with the prior-year’s loss of 3 cents. The same for revenues implies 17.9% year-over-year growth. Assertio’s consensus mark for 2022 earnings has moved north by 8.1% in the past 60 days.

Acadia Healthcare’s earnings beat earnings estimates in two of the trailing four quarters, matched once and missed the remaining one, the average surprise being 4.40%. The Zacks Consensus Estimate for ACHC’s 2022 earnings suggests an improvement of 19.1% from the year-ago reported figure, while the same for revenues indicates growth of 12.1%. Acadia Healthcare has a VGM Score of B.

Shares of ShockWave Medical, Assertio and Acadia Healthcare have gained 22.6%, 114%, and 26.2%, respectively, in a year.

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