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Why Centene Is the Most Important Healthcare Stock

InvestorPlace logo InvestorPlace 9/25/2020 Dana Blankenhorn
a person standing in front of a door: HUM Stock Is the Best Health Insurer in the Bunch Now © Source: Shutterstock HUM Stock Is the Best Health Insurer in the Bunch Now

On the surface, Centene (NYSE:CNC) seems to be the healthcare stock most threatened by today’s politics. In fact, it and CNC stock may be the least threatened. By making a profit on Medicare and Medicaid contracts, Centene has transformed health care in a way that goes beyond politics.

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While Centene has transformed America’s largest industry, it has done relatively little for investors lately. Over the last two years, shares are down 23%. The stock opened for trade Sept. 24 at $55 per share. That’s a market cap of $31.8 billion, a price-earnings ratio of just 17.5. It’s worth barely one-third its annual revenue of $91 billion.

Founded in 1984 by a hospital bookkeeper, Centene has become a giant under Michael Neidorff, who became CEO when the company was doing $40 million in business per year a quarter-century ago.

Centene’s Secret Sauce

The secret sauce of Centene is no secret. It’s called managed care. Non-profits like Kaiser Permanente have been all about managed care for years. Neidorff simply brought the model to the for-profit market.

Under managed care, costs are controlled by owning clinics and other facilities which deliver it. Managed care also focuses on prevention, on keeping patients out of the hospital. About 75% of America’s medical bills come from chronic conditions, diseases like diabetes and heart disease. By staying on top of patients, with preventive care and careful monitoring of medications, Centene keeps people out of the hospital.

This lets Centene make a small profit on Medicare and Medicaid contracts, despite constant political pressure to cut those costs. This is a business its rivals don’t touch, except for “Medigap” plans that enhance Medicare.

For the second quarter of 2020 Centene earned $1.2 billion, $2.05 per fully diluted share, on revenue of $27.7 billion. Revenue was up 50%, and profits up 250% from a year earlier, thanks to its acquisition of Wellcare, a $17 billion deal that closed in January.

Why the Fall of CNC Stock?

Investors are down on Centene for what seem like good reasons. Its margins are lower than those for traditional insurers like United Healthcare (NYSE:UNH), Cigna (NYSE:CI) and Humana (NYSE:HUM). But its business model is more sustainable.

While its rivals were losing customers during the pandemic, Centene added 1.1 million of them. Its model lets it consistently price policies on Healthcare.gov for less than rivals, and deliver more care.

The fact Centene is an Obamacare winner is why investors have been dumping the shares. The death of Justice Ruth Bader Ginsberg sent shares down nearly 10%. Investors believe the law will soon be declared unconstitutional and Centene will lose that business. Even if it isn’t, many believe Democrats will replace Medicare with a government-run plan.

Both sides of the argument are wrong. Managed care delivers better care for less than conventional insurance. If the exchanges are closed, Centene will find other ways to get that business. The Biden healthcare plan, meanwhile, doesn’t call for people to only be offered a state-run Medicare. It suggests consumers be able to buy into Medicare. The easiest way to do that would be through Centene.

The Bottom Line

While investors have soured on Centene, analysts haven’t.

There are seven following the stock on TipRanks and five say “buy” it. Their average price target of $78.21 is 42% ahead of its current price. The 20 Centene analysts covered by Marketbeat also have a consensus rating of “buy” with a price target of $83.

Personally, I like Centene for the same reason many analysts now like Tesla (NASDAQ:TSLA). By linking the income of payments to the outgo of clinics, they have built a better health care mousetrap. Managed care works, politics be damned.

On the date of publication, Dana Blankenhorn did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear,  available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn.

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