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Why Should You Hold on to Centene Stock in Your Portfolio?

Zacks Equity Research

Centene Corporation CNC has been in investors’ good books on the back of growing revenues and a robust 2020 outlook.

For 2020, management expects its revenues in the range of $110-$112.4 billion, the midpoint suggesting a 45.5% increase from the 2019 reported figure. Adjusted EPS is anticipated between $4.56 and $4.76 per share, the midpoint indicating a 5.4% hike from the year-ago reported figure.

Here we discuss the reasons for retaining this Zacks Rank #3 (Hold) health insurance company in your investment portfolio. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

In the first quarter of 2020, the company’s total revenues grew 41% to $26 billion from the year-ago period, primarily aided by the WellCare buyout, growth in Health Insurance Marketplace business, expansions and new programs across many states in 2019 and 2020 as well as the reinstatement of the health insurer fee in the current year. As of Mar 31, 2020, managed care membership came in at 23.8 million, up 61% year over year.

The company’s major acquisition of WellCare in January 2020 bodes well for the long haul. The consolidated entity now has a wider scale and diversification with more than 12 million Medicaid and around five million Medicare members. In total, it has around 22 million members across 50 US states. The transaction is expected to generate adjusted earnings per share accretion in approximately mid-single digits during 2021 with long-term growth opportunities and cost reduction across markets and products.

Medical membership of the company has been rising over the past several quarters owing to contract wins and expansion in different geographies. In 2018 and 2019, the metric rose 14.7% and 8.8% each year over year. We expect this trend to continue on the back of certain contract gains.

However, the company’s bottom line is hurt by higher operating costs. Since 2007, total operating costs have been increasing significantly.  In 2018 and 2019, total operating expenses jumped of 24.3% and 24.2% year over year (almost equal to the improvement in revenues), stemming mainly from steep medical costs, selling, general and administrative (SG&A) expenses, amortization of acquired intangible assets and a premium tax expense. In the first quarter of 2020, the metric again shot up by almost 46% year over year. The company expects the costs to significantly escalate in the third and the fourth quarter due to intensity of utilization rates and other investments.

Nonetheless, the company is well-poised for growth, which is evident from its VGM Score of B.

Its long-term growth rate stands at 14.70%, higher than the industry's average of 13.60%.

Shares of the company have rallied 19.5% in a year's time, outperforming its industry's growth of 16%.

The price performance looks stronger than other companies in the same space, such as Molina Healthcare Inc. MOH, Anthem Inc. ANTM and The Joint Corp JYNT, all currently carrying the same Zacks Rank as Centene. While Molina and Anthem have gained 11.8% and 2.9% each, Joint Corp has lost 10% in the same time frame.

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