Centene Stock: Winners Win (NYSE:CNC)

In this environment, we are looking for stocks that are offering both value and some growth. One sector that has done well despite the recent chaos in markets has been healthcare, and specifically, health insurers. One stock that we like in particular is looking to make a continued run, and we think you can ride it higher on this wave until the momentum stops. The name in question is Centene Corporation (NYSE:CNC).

The company has been around for nearly 40 years, founded in 1984 as a nonprofit Medicaid plan by a former hospital bookkeeper. Interesting little story there. It has grown and grown every five years, it seems. This company is the largest Medicaid Managed Care Organization. We recommended this stock to our membership in April 2021 at just under $60. At today’s price, it has returned well over 50% in a year.

Winners win. This company is a winner. We still like it. It has gotten a little ahead of itself, but you can ride the momentum. Selling puts is a winning moneymaking strategy in our estimation. Let us discuss

For those unfamiliar, Centene is the largest insurance carrier on the Health Insurance Marketplace. Centene is also one of the nation’s largest managed services providers for military families and veterans through its TRICARE program with the Department of Defense. Frankly, this offers a steady stream of income, as the military and its programs will always have the funding thanks to our tax dollars, and our service members deserve quality coverage, in our humble opinion. So, the customer base is substantial.

The company has also been making moves with its offerings. They have made a number of company purchases over the years but also have been doing some divesting, such as offloading PANTHERx Rare, which it bought in 2020. They also are offloading Magellan Rx as well. The money will be used to retire debt and to buy back shares, increasing shareholder value. Centene also initiated a reduction of its real estate footprint recently, as more employees are telecommuting. In short, it is cleaning up its operations, and simplifying the balance sheet.

Performance in the just-reported quarter today was strong. Again, we are looking for a combination of growth and value. Growth is quite clear. In Q2, total revenues jumped a strong 16% to $35.9 billion rising from $31.0 billion last year. That is a $390 million beat versus consensus.

Much of this was from straight organic growth in Medicaid members. Traditional Medicaid Members grew to 13.758 million from 12.492 million last year. Excellent. At the same time, the so-called High Acuity Medicaid saw growth to 1.688 million, from 1.531 million. The commercial marketplace was about flat at 2.03 million members, while Medicare grew to 1.483 million from 1.183 million members. TRICARE eligible members were also flat. Overall, solid growth, with total members overall rising to 26.440 million from 24.673 million a year ago.

Costs have been an issue, and that was something cited by Bank of America in an ill-timed downgrade recently. The big number to watch is the cost of service ratio, which was 85.4% vs 89.6% in the same period in 2021. The decrease in the cost of service ratio stems from picking up the Circle Health business, which always has operated at a lower cost of service ratio. At the same time, selling and administrative expenses increased. The ratio jumped to 8.2% from 7.4% last year.

Now, the company lost money on a GAAP basis this quarter. The loss per share was $0.29. Remember that we told you the company was reducing its real estate footprint? Well, the company took a $1.45 billion charge on its real estate. If we account for this charge, the adjusted EPS was $1.77, another beat of $0.18 vs estimates. Winners win.

So, what about the balance sheet here? We have rising members. We have the company selling off some assets and shoring up its real estate footprint. Revenues and earnings are growing. But are they in major debt? Well at the end of Q2 they had $30 billion in cash, investments, and deposits, while also having nearly $800 million in cash and equivalents in some unregulated entities. They had claims liabilities of $16.6 billion. Total debt is $18.8 billion, with a debt to capitalization ratio of $18.8 billion. That is a bit sizable but is expected to improve with sales of assets. We love the massive share repurchases as well, as the Board authorized a $3.0 billion buyback. So far, they have bought back $450 million worth in 2022. Now, when PANTHERx is sold, and Magellan, they will use the cash to buy back shares and retire debt.

We have some growth and an improving balance sheet. While the multiple has expanded here thanks to the higher share price, the company has a reasonable valuation. Most notable, the EV/sales is a paltry 0.46, the price/sales is 0.43, the stock is 16X FWD EPS, and the price to cash flow is 10X. That is pretty attractive relative to the healthcare sector. While the growth is not explosive and could narrow with asset sales, the valuation makes this attractive.

The take home

Centene is currently riding momentum higher, and traders can jump on this. We think selling puts is an easy way to make cash on this one. While the stock is getting more expensive, the valuation has improved. Growth is so-so but is there. More importantly, they are cleaning up the balance sheet and also buying back a ton of stock. We think this one is a winner.