This health insurer beat Wall Street’s estimates by $0.11 last quarter.
Centene (CNC)
From Dow Theory Forecasts
Few companies have benefited more from the Affordable Care Act than health insurer Centene (CNC). About 20% of Centene’s profits come from the Medicaid expansion and individual exchanges. And few companies have more to lose if ACA is dismantled. ACA has dodged multiple repeal attempts by Republicans this year, though lawmakers still seek to undercut the law.
Nevertheless, Centene shares have rallied 15% in the past three months, pushing their gains for 2017 to 70%. Also encouraging, the company’s profit estimates for 2018 have steadily climbed over the past 90 days.
Despite the rally, Centene shares still look cheap versus peers and their own history. Centene is a Focus List Buy and a Long-Term Buy.
Zigging while others zag Centene’s medical membership has grown 8% in the past year to 12.3 million members. In 2017, Centene’s presence on state and federal ACA exchanges has nearly doubled to 1.1 -million members, while many other health insurers have fled the market. Now the largest player on public exchanges, Centene has focused on cheaper health plans geared toward lower-income customers, many of whom receive government subsidies.
ACA enrollment on the federal exchanges for 2018 reached 1.5 million people in the first 11 days of the sign-up period, up 50% from the comparable period last year. But questions about the future of public exchanges still swirl. The U.S. Senate’s tax proposal includes measures expected to increase the number of uninsured Americans. Additionally, President Trump’s executive order to discontinue monthly insurance reimbursement could reduce Centene’s 2017 per-share profits $0.07 to $0.12.
Centene says it raised premiums for 2018 in case the subsidies would end. Despite recent growth on the ACA exchanges, Centene’s core business remains Medicaid, accounting for about 70% of revenue. Centene covers 7.1 million Medicaid members, a number that will swell to 8.4 million following the pending $3.75 billion acquisition of Fidelis Care. The next largest managed-care company in the Medicaid space is Anthem (ANTM), with 6.5 million members.
The Medicaid business has narrow profit margins, but it remains a key growth driver for the company. More states are switching to the managed care model that Centene operates rather than fee-for-service. This trend seems likely to continue as states seek to contain Medicaid costs. Centene will be offering Medicaid plans in eight new states next year.
Government reimbursement rates are likely to remain under pressure. But medical costs continue to rise at mid-single-digit rates, below the growth rates seen during much of the last decade, limiting pressure on profit margins. Centene will outline its 2018 targets on Dec. 15. The company continues to expect public exchanges to help drive growth, boosted by higher enrollments and stable margins. The current consensus forecasts 2018 per share profits of $5.53, up 11%.
Richard Moroney, CFA, Dow Theory Forecasts, www.dowtheory.com, 800-233-5922, November 27, 2017