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Why Is Centene (CNC) Down 1.4% Since Last Earnings Report?

A month has gone by since the last earnings report for Centene (CNC). Shares have lost about 1.4% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Centene due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Centene Q3 Earnings Top on Medicaid Arm, Revenues Rise Y/Y

Centene reported third-quarter 2022 adjusted earnings per share (EPS) of $1.30, which outpaced the Zacks Consensus Estimate by 6.6%. The bottom line grew 3.2% year over year.

CNC’s revenues of $35.9 billion advanced 11% year over year in the quarter under review and also beat the consensus mark by 1.1%. Our estimate for the metric stands at $35.3 billion.

Shares of Centene gained 3.6% in the pre-market trading session, courtesy of better-than-expected third-quarter results.

The quarterly results benefited from higher premiums owing to significant membership growth within Centene’s Medicare business. The acquisition of Magellan Health and organic Medicaid growth also contributed to the upside. However, the positives were partly offset by the divestiture of PANTHERx completed in July 2022 and elevated operating expenses.

Quarterly Operational Update

Revenues from Medicare surged 30% year over year in the third quarter. Revenues from Medicaid improved 8% year over year, while Commercial revenues declined 2% year over year.

Premiums of $31.8 billion rose 10.3% year over year in the quarter under review, while our estimate for the metric stands at $30.7 billion. Service revenues climbed 14.7% year over year to $1.9 billion.

As of Sep 30, 2022, total membership grew 4.5% year over year to 26.8 million, courtesy of Medicare and Medicaid businesses.

Health Benefits Ratio (HBR) deteriorated 20 basis points (bps) year over year to 88.3% in the third quarter. The metric was affected by a recovering normalized Medicaid utilization and worsened from the prior-year quarter’s level. However, the downside was partly offset by prudent pricing actions undertaken within the Marketplace business.

Net earnings of $740 million climbed 27.4% year over year. Total operating expenses of $35.4 billion escalated 11.1% year over year in the quarter under review. Our estimate for the metric stands at $34.5 billion.

Selling, general and administrative (SG&A) expenses rose 12.2% year over year to $2.8 billion. Cost of services of $1.6 billion increased 15.9% year over year. Medical costs of $28.1 billion grew 10.5% in the quarter under review.

Adjusted SG&A expense ratio came in at 8.3%, which deteriorated 20 bps year over year.

Financial Update (as of Sep 30, 2022)

Centene exited the third quarter with cash and cash equivalents of $15 billion, which increased 14.2% from the 2021-end level. Total assets of $81.2 billion rose 3.6% from the figure at 2021 end.

Long-term debt amounted to $18.1 billion, down 2.6% from the level as of Dec 31, 2021. The current portion of long-term debt was $249 million.

Total stockholders’ equity of $25.5 billion slipped 5.2% from the 2021-end figure.

During the first nine months ended Sep 30, 2022, net operating cash flow of $7.8 billion more than doubled the prior-year comparable period’s number.

Repurchase Update

In the third quarter, Centene bought back 8.6 million shares as part of the accelerated share repurchase (ASR) agreement inked to utilize the proceeds of PANTHERx divestiture. Also, additional shares worth $240 million were bought back in the quarter under review. CNC had $2.2 billion left under the share buyback program as of Oct 25, 2022. Also, as of the same date, Centene’s debt buyback program had an available capacity of $700 million.

2022 Guidance

Management anticipates revenues within $142.7-$144.7 billion, up from the previous outlook of $141.6-$143.6 billion. The midpoint of the revised guidance indicates 14% growth from the 2021 figure.

Premium and service revenues are projected within $134-$136 billion for 2022, higher than the earlier view of $133.3-$135.3 billion.

Adjusted EPS is projected to be $5.65-$5.75 compared with the prior guidance of $5.60-$5.75. The midpoint of the altered guidance suggests a 10.7% improvement from the 2021 reported figure.

Diluted shares outstanding are anticipated within 582.5-585.5 million, down from the earlier view of 583-586 million.

Management maintains the guidance for the following metrics. HBR is estimated in the 87.6-88% band. Adjusted SG&A expense ratio is expected within 8-8.5% this year. It also expects an adjusted effective tax rate of 25.3-26.3%.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month.

VGM Scores

Currently, Centene has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions has been net zero. Notably, Centene has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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