Centene (CNC)

Have you ever wished you could have invested in a Managed Health Care company such as United Health or Anthem 
when they were small and growing like a technology company?  Maybe you have and been rewarded handsomely over the years.  
But if you haven’t, then you may be in luck with a small company that is operating in a niche market that is overlooked 
by most of the larger behemoth companies that aren’t quite as nimble and able to adjust to the ever changing regulatory
environment.  This company is Centene (CNC).  They only have a market cap of 7.45B which is tiny compared to United at
111.83B or Anthem at 36.77B.  

Centene is a small company based out of St. Louis, MO that provides services primarily targeting the underinsured and 
uninsured through programs such as Medicaid, ABD, Foster Care, LTC and CHIP.  These are highly regulated programs that 
are difficult to navigate for larger companies because they vary from state to state.  This is a quickly growing and 
lucrative area in the health insurance business to be in.  CMS, the federal agency that runs the Medicare and 
Medicaid programs, estimated the total Medicaid and CHIP market to be about $421B in 2012.  It is estimated to grow to 
over $920B by 2023 and Centene plans on capturing the bulk of that if they can.  Part of the difficulty of profitably 
operating in these programs is that each state establishes its own standards for eligibility and payment rates resulting 
in 56 different Medicaid programs – one for each state, U.S. territory and the District of Columbia.  No wonder the larger 
more established companies are having a harder time getting these programs rolled into their existing portfolios. 
Centene started out in 1984 as a small one plan company and has quickly grown into a very successful insurance company 
operating in 23 states, 2 international markets providing over 226 solutions and has quickly risen to #186 on the Fortune 
500 list.  They have 10 subsidiaries that are generating close to or over $1B each.  They are growing quickly and have no 
plans of slowing down anytime soon.  As of 2014 their 5 year CAGR of premium and diluted earnings and stock price have 
been 32%, 18% and 37% respectively.  

I think if you are looking to add a company in the health care industry, specifically the insurance piece, and looking for 
a smaller faster growing company as opposed to a blue chip like United, then Centene may be your best choice. 
Some high level results for 2014:
*Year-end managed care membership of 4.1 million, an increase of 1.2 million members, or 41% over 2013.
*Premium and service revenues of $15.7 billion, representing 48.8% growth year over year.
*Health Benefits Ratio of 89.3%, compared to 88.6% in 2013.
*General and Administrative expense ratio of 8.4%, compared to 8.8% in 2013.
*Total operating cash flows of $1.2 billion, or 4.6 times net earnings.
*Diluted net earnings per share of $2.23, compared to $1.43 in 2013 for 56% YOY growth. 

*Guiding for revenue of $20.8 -$21.2B for an increase of 
34% and earnings per share of $2.70-$2.82 for an increase of 24% at the mid-point for 2015.

In millions except EPS					

	    2010    2011    2012    2013    2014
Revenue	   4,284   5,052   7,682   10,523  15,667 
Earnings     95	    111	     2	    165	     271
EPS	    0.94   1.06	   0.02	    1.47    2.25

			      2012	2013	2014
HBR (Health Benefit Ratio)    89.6%	88.6%	89.3%
General &Admin Expenses	      8.8%	8.8%	8.4%

Quarterly EPS Data	1st	2nd	3rd	4th
2013	                0.21	0.35	0.43	0.46
2014	                0.28	0.39	0.68	0.88
2015	                0.52	0.72	

PY TTM	 $1.56 	
TTM	 $2.80 	
TTM YOY Growth % 79%
Current Price	$62.52 
TTM P/E		22.33
1YR PEG		0.28

I hope someone finds value in this and can benefit from it.  I welcome all feedback, thanks!

UNH & ANTM Ticker Guide

Chad, thank you for the post. CNC was one of 5 companies that I sifted out of the market about 3 months ago, my first effort to find “Saul companies”. After my May purchase, the stock moved up 10% and with this confirmation bias in place, I added to the position and then (now) waiting for another quarterly. Then(I think in response to the UNH purchase?) the stock price eroded and the first purchase is down 12.3% and the second is 22.7% under water.
I suppose there are two issues for the investors. First is the integration of UNH which I believe is the larger of the two companies. Second might be some level of uncertainty over the future of the Affordable Health Care Act since CNC market is under and uninsured families.
I obviously need to pour over the latest quarterly and am tardy in doing so. It is only 0.2% of my holdings which is why I have not rushed to do it.
Will be interested inputs/corrections and others’ analysis.



Dont let the ACA “uncertainty” scare you. Over 30 million Americans are now insured because of it - about 10% of the country - with 20 states not yet expanding medicaid.

There are multi-billion dollar companies such as CNC that now have their own livelihood at stake in this game.


I can not possibly imagine cutting the ACA and having companies such as CNC crumble in the process.

What would be important to monitor for CNC is the number of states expanding (or considering to expand) medicaid. The political landscape of Texas and Florida, the two largest states not currently set to expand medicaid, would also be of interest for CNC shareholders.


(sorry, not meant as a political post, but hard to avoid for this scenario)

I have no concerns, myself, about the future of ACA. Just looking for any reasons for the sell off. The proximate “cause” for the first sell off was the announcement of the Health Net acquisition (not United Health, sorry). A concern at the time was an expectation that United Health might get into a bidding war. That hasn’t happened but the share price has remained depressed. The rest of the share price drop was in the mid-August mini-melt down.
I didn’t find any disturbing factors in the Health Net acquisition. The management, of course, is gushing good news over it. One could be excused for seeing all this as a buying opportunity of CNC.


Hi KC,

I agree it’s not fun to have a holding underwater. The recent pullback is one of the reasons I’ve become interested in it more. The stock started dropping on July 2nd after the announcement of it acquiring Health Net which is a large proved of VA benefits. There were forecasting revenue of around $21B for the year and said the merger would be immediately accretive. This was said during the merger “The combined firms will have estimated pro forma premium and service revenues of ~$37B this year and the merger will be significantly accretive to EPS in the first year after closing.”

They are competing in a tough area but what I like is that they specialize in this area and growing in it is what they’ve been doing for years. The bigger players are realizing this and are now spinning to try and get into it which is not as easy. The competition and risk is there but I’m thinking they will do well. It wouldn’t surprise me if they get taken out at some point.


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I agree that watching the number of states expanding is good as this presents opportunity. Centene is also focused on growing in other ways within the stages they exist even without the expansion piece. For example, Texas and Florida are their two biggest started from a revenue perspective even without the expansion.


Hi Chad, Thanks for the interesting post. I have two questions:

What does “Premium and Service” revenue mean?

Why would announcing a merger that will be immediately accretive, and that they are paying for without issuing more shares, cause the price to immediately start falling? That makes no sense to me.


Oh, Chad, I thought of two more questions:

What is Health Benefits Ratio?

And finally, since you have been following the company, can you explain in simple words: “What do they actually do?”

Thanks again,


Hi Saul,

I’m not totally sure why the stock price fell with the news. What I did notice is that this was during the time frame that the other larger companies were announcing mergers as well. When I plot CNC, UNH and HUM on the yahoo finance during that time they all start moving downward, just CNC moved sharper, so I don’t think the price move in CNC was independant of the announcement, maybe throwing the baby out with the bath water.

Premium and Service is how they categorize their revenue streams. Premiums are teh payments they get from either the members for participating on their plans or the capitated payments they recieve from the government for the contracts with the state to provide their programs such as Medicaid and LTC. This is the piece that is more regulated and is impacted by the HBR% which states they must pay a specific percentage of the premiums they recieve back in medical costs or provide a refund for the difference. Services revenue comes from their many subsidiaries such as US Scripts that provides Pharmacy benefits managment and other services such as Behavorial Health programs and many more. They also provide data analytics and services to providers for insights as well. The revenue that comes from this source is not as regulated and they can keep 100% of it since it’s not directly related to money coming from the member for medical coverage. This is the area you see all health care companies drastically trying to increase as they get to keep it all.



Let me try.

The premium part of course is easy. Income from premiums paid by individuals. The services are sort of an "other category and are 11% of revenue. Centene has 11 other businesses, jv’s, or what not. These provide dental services, pharmacy, specialty pharmacy, behavioral whatever, medical services to inmates and so on. Exactly to whom these services are provided, or with whom they are contracted is not clear to me.
Why the stock went down on the United Health announcement. I think the market did the math. Centene paid 21% premium for a company that was, I believe, about 80% the market cap of Centene, resulted in about a 10% drop. Market then said, accretive? Show me how much in the first year, etc.

Health Benefits ratio: medical costs as a percent of premium revenues.

What do they actually do? They compete with a bewildering array of companies to provide a range of insurance coverages. Competition is state-by-state. Covers medicare and medicade and other state programs for health care for disadvanted. They advocate the use of managed health care (HMO approach???) which is new in this area of health care. They acquire. There is a growth through acquisition story which, I think, is larger than organic growth, but hard to say really because everything is state-by-state and some acquisition is to get a presence in a particular state and grow from there. But more basically, they are just a medical insurer that specializes in the arena of subsidized health care insurance. But there are pharmacy components, HMO component, dental, etc., etc., and state-by-state the regulators have different approaches and standards and… you know, it seems really complicated from a sales/marketing standpoint. Not like selling chips to GoPro, or shoes to consumers. It is not a 10-k that you can just read through like a restaurant or retail company.

Hoping Chad can add and/or correct.



Hi Saul,

It seems that each health care company calls it something different but they all mean the same thing. Health Benfits Ratio or Medical Loss Ratio or some other names is a measure of the percentage of premiums that was paid in relation to medical claims. So say a member pays $100 a month in premiums for the year for a total “Premium Revenue” of $1,200 to the company. The company then has to pay on claims that are filed for medical purposes. So if they company paid a total of $900 that year in medical claim reimbursement their HBR would be 75%. The regulated piece comes in due to the ACA that says the company has to pay a minimum percentage toward health related claims are provide a refund. Depending on the plan type it can range from 80-85% so in this example above the company would have to refund the difference to get it up to that minimum number. Few companies ever run into the problem. This is why building out their service revenue is so critical.

They operate locally in each of their markets. They serve and target the underinsured and uninsured through their special programs. They target the individuals that are low income and special needs that most other insurers hope to not have to insure. They set up contracts in each of the states they operate in, 23 currently, to provide care for the individuals that meet certain criteria. They not only cover those individuals by providing care and coverage but have lots of outreach programs such as “Start Smart for Your Baby” and “CentAccount” that educate and incentivize members to improve their health and connect with their communtity and local health care providers. They get very involved in the communities they are in to help drive down the costs before they become a much larger issue by focusing on prevention. They do this through many subsidiaries such as US Scripts for PBM, AcariaHealth for specialty pharmacy, USMM for home health care, and NurseWise for telehealth medicine where people can talk to their physician through phone and webcam for care instead of going to an office.



Guiding for … earnings per share of $2.70-$2.82 for an increase of 24% at the mid-point, for 2015

Hi again, Chad,
I realize you don’t know any more about this than I do, but considering that Centene has trailing earnings of $2.81 now, after just the first two quarters, an estimate of $2.70 to $2.82 for the year sounds like a wildly conservative underestimate. Have they usually underestimated and over-performed?

$2.70 to $2.82 for the year sounds like a wildly conservative underestimate. Have they usually underestimated and over-performed?

Never mind Chad, looking back through their last two years of earnings releases, I see they increase their estimates every quarter.
Thanks for the recommendation.

They have. Every estimate I was able to find they came in above so far.

In June of 2014 they projected $1.80-$1.95 and delivered $2.23. It seems the $2.76 won’t be too hard to beat. And this $2.76 is an upward revision from the one they gave earlier this year which was $2.66.


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