Ticker: CNC
Market capitalization: $40.9B
Enterprise value: $39.2B
Price: $76.50 (as of 2/8/24)

What the Company Does

Centene is a leading managed care provider in the United States, delivering healthcare products and services to government-sponsored programs such as Medicaid and Medicare, as well as commercial programs (i.e. employer-sponsored health insurance). The company looks to serve underinsured and uninsured individuals in the US with its network of primary & specialty care physicians and hospitals with the goal of keeping costs low and access to quality healthcare high. With more than 27MM members, CNC serves approximately 1 out of every 15 individuals in the US. CNC is the top Medicaid managed care organization (MCO) in the US with roughly 14.5 million members enrolled as of year-end 2023, representing approximately 17%1 of the total US Medicaid population, and also holds the top spot in the private health insurance marketplace.

Why We Own It

CNC offers strong growth prospects at a compelling valuation. Government-sponsored program spending is projected to grow 64% from 2022-2031, with Medicaid spending expected to grow at a 5% CAGR to $1.2T over the same period. Although Medicaid eligibility redeterminations are expected to create a ~$7.5B revenue headwind in 2024 due to the recent conclusion of the COVID public health emergency, this process should establish a solid foundation for future growth, with management guiding for top-line growth at a 6-7% CAGR over the long-term from this segment, implying it also expects to steal more market share from peers. While CNC lags behind peers in Medicare membership, it has the largest concentration of dual-eligible2 special needs plans (DSNP) among its peers, with the added complexity of these products contributing to higher per-member per-month revenue relative to other plans.

Management is guiding for EPS growth of 12-15% over the long-term, outpacing top-line growth expectations in the mid-single digits, as management looks to benefit from operating leverage while reining in costs and growing its higher-margin segments to become a larger proportion of total revenue. Despite this robust long-term growth profile, shares are trading at a 30% discount to peers (UNH, MOH, HUM, ELV) based on 2025 EPS estimates. CNC trades at a trailing-twelve month (TTM) free cash flow yield of 17.7%, while none of its peers have TTM FCF yields >8%.

How Management Allocates Capital

Management’s capital allocation priorities are 1) funding organic growth, 2) share repurchases, 3) maintaining a debt-to-Adjusted-EBITDA leverage ratio of <3x, and 4) M&A. CNC is already below its target leverage ratio with leverage sitting at 2.9x as of year-end 2023. If management executes on planned share repurchases of $3.3B in 2024, CNC will have bought back $8.0B worth of its stock between 2022-2024, amounting to ~20% of the company’s current market cap.