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Centene on Track With Inorganic Strategies to Aid Growth

Zacks Equity Research

Centene Corp. CNC is well poised for long-term growth on the back of its successful acquisition profile, which complements its organic growth.

The company has, to its credit, a number of acquisitions. The most notable ones are that of Fidelis Care, made last year, which expanded Centene’s scale and size in New York State, and MHM Services, a behavioral healthcare company. Its acquisition of Health Net in 2016 also broadened the service offerings.  Further, the company has also made small purchases that act as bolt-on to its existing business.

The company’s membership, revenue and earnings growth in 2018 was primarily driven by the Fidelis Care acquisition. Health Net also accrued to the company’s 2017 earnings and revenues. This reinforces its success at integrating acquisitions.

Notably, it recently inked a deal to buyout WellCare Health Plans Inc. WCG for about $17.3 billion.

The deal is expected to generate nearly $500 million of cost synergies by the second year of the takeover and add to adjusted EPS by mid-single-digit percent.

The deal will broaden Centene’s government business that consists of Medicaid and Medicare and will place it at the 5th position in the health insurance industry with respect to pro-forma revenues and EBIDTA.

It will also make Centene the number one player in the Medicaid market (accounting for 65% of the combined company’s total revenues). This market is expected to grow as many states are adopting Medicaid expansion.  Other niche players in this market are Molina Healthcare Inc. MOH and Humana Inc. HUM

The company inorganic growth strategies have sided an impressive operating performance, having generated shareholders’ return of nearly 935% since 2010.  Its membership has grown since then from 1.5 million to 14.5 million till 2018. Furthermore, it expects the same to increase to more than 22 million members in 2019.

The company’s acquisition strategy is backed by its financial strength and scale, which generates significant cash flow from operations.  Though the WellCare buyout will increase leverage ratio, significant cash flow from operations will be used to bring down debt levels.

Centene carries a Zacks Rank #1 (Strong Buy). Year to date, the stock has lost 0.6% against its industry’s growth of 2.5%. The fall in price gives an attractive entry point as it is relatively undervalued and currently trading at a 12-month forward price-to-earnings ratio of 13.2, which compares with the industry’s P/E ratio of 15.6.

Also, the stock carries an impressive Value Score of B. Our research shows that stocks with a Value Score of A or B when combined with a Zacks Rank #1 or 2 (Buy) offer the best opportunities in the value investing space. You can see the complete list of today’s Zacks #1 Rank stocks here.

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Centene Corporation (CNC) : Free Stock Analysis Report
WellCare Health Plans, Inc. (WCG) : Free Stock Analysis Report
Humana Inc. (HUM) : Free Stock Analysis Report
Molina Healthcare, Inc (MOH) : Free Stock Analysis Report
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