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Centene CorporationCNC
University of California, Berkeley
Advaita Patel, Amy Hu, Nichanan Kesonpat, Vanessa Guo
“Better Health Outcomes at Lower Costs”
Introduction & Investment Thesis
Company: Centene CorporationTicker: CNC (NYSE)Current Price (Nov. 25 Close): $56.7652-week range: $48.08 - 83.00
Recommendation: BUYTarget Price: $79.8
1. Steady Growth via acquisitions and expanding into International Locations
2. Diversification of revenue by moving into other markets and new product lines
3. Industry Leader with industry leading 5-year CAGR and low P/E
Source: Google Finance
CNC YTD Stock Performance
Leadership
Management: - Michael F. Neidorff, Chairman, President & CEO- William N. Scheffel, CFO, Treasurer & Executive VP - Donald G. Imholz, CIO & EVP-Operations- Ken Yamaguchi, CMO & Executive VP
Partnerships
2008: 8 states, 70 solutions2015: 23 states, 2 intl’ markets, 226 solutions
Revenue Generators Overview
● Provide health insurance solutions for the underinsured and uninsured
● Medicaid, Medicare, Health Insurance Marketplace (HIM) and other Health Solutions through specialty services companies
● Works with over 4.8 million members across 23 states to deliver healthcare locally
● By delivering quality healthcare locally, provide accessible, high quality and culturally sensitive healthcare.
● Customized solutions for partners to address distinct needs
Company Overview
Source: Yahoo Finance
Share Price (Nov. 25 Close): $56.76- Q3 premium and service revenue ↑31% compared to last year's quarter (expansions/new programs in partner states)
- Business Expansion & Contraction costs are decreasing as a percentage of Premium & Service Revenues
- Q3 profit ↑13% from last year's quarter (higher revenue, increased membership)
- Revenue ↑34% in the recent quarter
Premium & Service Revenue Growth
Adjusted EBITDA ($ in millions)
Company Overview: Financials
Macroeconomic Highlights
US Markets ● The aging population of Baby Boomers expected to increase● GDP and household incomes are increasing steadily ● Obamacare requires Americans to have health insurance
International Markets ● UK and Spain have Universal Health Care ● Government spending and regulations
● Many more mergers and acquisitions including Aetna acquiring Humana and Anthem acquiring Cigna
● Investors have a positive response to Affordable Care Act ● Companies are shifting to a more consumer-oriented mindset ● The new emphasis is on the quality over the quantity of
healthcare
Industry Highlights
Industry Overview
Barriers to entry HIGH
Substitutes LOW
Buyer powerNOT INTENSE
RivalryNOT INTENSE
Supplier power RELATIVELY HIGH
Centene is favorable in the
industry.
Barriers to entry: ● Large established corporations ● Regulations in different states ● Government regulations
Substitutes:● Other private
companies● Other Medicare or
Medicaid providers● No healthcare
insurance
Buyer Power: ● Other healthcare
insurance companies
● Other Medicare or Medicaid providers
Rivalry: ● Centene (w/HealthNet): 23
states; 11 million users● Amerigroup: 26 states; 7.7
million users ● Molina: about 10 states;
3.5 million users ● Wellcare: about 7 states;
2.2 million users
Supplier Power: ● Those that supply
Centene’s materials and resources
● Hospitals, healthcare clinics, healthcare provider centers
● State and federal governments
Porter’s Five Forces Analysis
● Managed Care accounts for 89% of the revenue
● Centene’s medicaid risk-based memberships are widely spread throughout the US
● Centene’s medicaid services increased 9.5 times over the last decade
Growing Medicaid Market
Steady Growth - Medicaid Enrollment
● An estimated growth of 1.7M Medicaid Members ● Expand Medicaid - Acquisition would result in
becoming the largest Medicaid Player● Significantly improve Medicare● Estimated of 75% growth in Revenue● Transaction expected to close in June, 2016
Prospective Benefits
Upcoming Acquisition
Centene’s strategies
● Started to add on services through federal and state-based public health insurance exchanges
● Entered international market in 2014● Increased membership across lines of business
Product Diversification
Membership by Line of Business
Product & Geographic Diversification
Industry leader 5-Year Compounded Annual Growth Rate for EPS and Premium & Service Revenue
Lowest P/E despite high growth potential and industry leading EPS- undervalued at $57
Valuation
Source: Yahoo Finance
CNC MOH WCG MGLN Industry
Market Cap: 6.77B 3.39B 3.64B 1.31B 5.03B
Employees: 13,400 10,500 6,700 6,600 20.00K
Qtrly Rev Growth (yoy): 0.31 0.46 0.01 0.29 0.18
Revenue (ttm): 19.85B 12.73B 13.81B 4.31B 19.85B
Gross Margin (ttm): 0.19 0.14 0.13 0.06 0.2
EBITDA (ttm): 853.00M 489.89M 447.80M 208.11M 853.00M
EV/EBITDA (ttm): 7.32 1.53 7.02 6.81Operating Margin (ttm): 0.04 0.03 0.03 0.03 0.05
Net Income (ttm): 350.00M 147.30M 113.40M 25.69M N/A
EPS (ttm): 2.87 2.76 2.55 0.97 2.76
P/E (ttm): 19.76 21.88 32.35 53.72 23.12
PEG (5 yr expected): 1.31 0.67 1.28 -5.76 1.25
P/S (ttm): 0.34 0.27 0.26 0.31 0.47
Return on Equity (ttm) 17.54% 11.87% 6.89% 2.10% 14.40%
Valuation
Company: Centene CorporationTicker: CNC (NYSE)Current Price (Nov. 25 Close): $56.76
Recommendation: BUYForecast Range: $60.6-101.6
Target Price: $79.8
2014 2013 2012 2011Diluted EPS 2.23 1.43 0.82 1.115
Year-end price 51.92 29.48 20.5 19.8P/E 23.3 20.6 25 17
3. Share Price Forecast
2. P/E History
Current EPS 2.85
Current Price 56.76
Current P/E 19.76
13-14 EPS Growth 56%
EV/EBIDTA 7.32
1. Valuation & Metrics Low Medium High
EPS Growth 25% 40% 55%
New EPS 3.5625 3.99 4.4175
P/E 17 20 23
Share Price 60.5625 79.8 101.6025
New/Old Price 107% 141% 179%
Valuation - EPS Growth Method
Historical Projected
Year 1 (2012) Year 2 (2013) Year 3 (2014) Year 4 (2015) Year 5 (2016) Year 6 (2017)Revenue ($ million): 8,110.30 10,863.33 16,560.00 21,528.00 27,986.40 36,382.32
Revenue Growth Rate: 35.74% 25.34% 34.40% 30.00% 30.00% 30.00%Operating Income (EBIT) ($ million): 107.97 277.42 464.00 603.20 784.16 1,019.41
Operating (EBIT) Margin: 1.33% 2.55% 2.80% 3.00% 3.00% 3.00%Tax Rate 38.50% 40.00% 48.00% 50.00% 50.00% 50.00%
Net Operating Profit After Taxes (NOPAT) 66.40155 166.452 241.28 301.6 392.08 509.704Plus Depreciation & Amortization ($ million): 0.06587 0.06742 0.089 10.764 13.9932 18.19116
% Revenue: 0.00081 0.00062 0.00053 0.0005 0.0005 0.0005Change in Operating Assets & Liabilities ($ million): 246 184 781 645.84 839.592 1091.4696
% Revenue: 3.03% 1.69% 4.72% 3.00% 3.00% 3.00%Less: Capital Expenditures: -82 -68 -103 -133.4736 -173.51568 -225.570384
% Revenue: -1.01% -0.63% -0.62% -0.62% -0.62% -0.62%Unlevered Free Cash Flow 230 283 919 824.7 1072.1 1393.7
Discounted Cash Flow
1. Estimating Beta
2. Capital Asset Pricing Model
Company Beta (L) Tax Rate Beta (U)Centene 1.11 0.48 1.01Molina 1.84 0.5734 1.65
WellCare 1.34 0.61 1.18Magellan 0.42 0.6125 0.39
Mean 1.1775 0.568975 1.0575Median 1.225 0.5917 1.095
Risk Free Rate 2.25Market Risk Premium 6Beta 1.11Cost of Equity 8.91
WACC Perpetuity Growth Rate
1.00 2.00 2.50 3.00 3.504.56 783.02 637.40 2368.0 3573.8 5917.05.56 611.31 553.09 1594.2 2177.7 3044.66.56 501.36 488.47 1201.5 1566.0 2049.67.56 424.93 437.38 964.08 1222.6 1544.88.56 368.72 395.96 804.99 1002.7 1239.5
3. Estimating WACC
Cost of Equity 8.91%Total Equity ($ million) 1,744Cost of Debt 3.64%Total Debt ($ million) 879Corporate Tax Rate 48%WACC 6.56
Discounted Cash Flow
Post Acquisition
Performance
Competition
Regulation
● The merge between two corporations will take time and effort on not just Centene but also hospitals, consumers, and other users of Centene and HealthNet. With any merger or acquisition, there will be conflict initially and then with time, all the services and conflicts will be smoothed out.
● The acquisition would result in Centene taking in $500 million in debt. However, the number of users is expected to increase to 11 million and an estimated service revenue of $9.2 billion.
● Other companies are continuously growing by additional mergers and acquisitions. With this upcoming acquisition, Centene poses as a real competitor to other large healthcare insurance companies such as UnitedHealth, Aetna, or Anthem.
● Centene looks towards expanding its own products and services into vision, dentistry, and foster care. ● Centene has already expanded into the United Kingdom and Spain to work internationally as well.
● Different states choose their own coverage. Centene successfully sued Kentucky over misleading information during the bidding process. However, Centene has already partnered with Massachusetts’s Correctional Facilities to provide additional coverage to those in the facilities.
● Affordable Care Act increases health care coverage across the United States for all people. This forces more people to look into Medicare and Medicaid for health care coverage when it is needed.
Risks & Mitigating Factors
Centene and Health Net merger: presentation at the Wells Fargo Healthcare conference in Sept ‘15http://www.centene.com/wp-content/uploads/2015/09/WellsFargoHealthcareConf09092015.pdf
June 2015 Investor Day presentationhttp://www.centene.com/wp-content/uploads/2015/07/June2015InvestorDay.pdf
Analyst Estimates comparing CNC to industry and sector (Yahoo Finance)http://finance.yahoo.com/q/ae?s=CNC+Analyst+Estimates
News on the health care plans sector http://biz.yahoo.com/ic/news/522.html
Press release of third quarter earningshttp://phx.corporate-ir.net/phoenix.zhtml?c=130443&p=irol-newsArticle_Print&ID=2102543
https://www.thelundreport.org/content/centene-corp-readies-take-over-health-net 11/20
http://www.thestreet.com/files/r/ratings/equities/CNC_weiss.pdf
http://pages.stern.nyu.edu/~adamodar/New_Home_Page/valquestions/acqcapex.htm