CNC Stock Study (8-30-23)

Posted by Mark on November 16, 2023 at 06:53 | Last modified: August 31, 2023 11:04

I recently did a stock study on Centene Corp. (CNC) with a closing price of $64.44.

M* writes:

     > Centene is a managed-care organization focused on government-
     > sponsored healthcare plans, including Medicaid, Medicare, and
     > the individual exchanges. Centene served 23 million medical
     > members as of September 2022, mostly in Medicaid (70% of
     > membership), the individual exchanges (9%), Medicare Advantage
     > (7%), and the balance in Tricare (West region), correctional
     > facility, and commercial plans. The company also serves 4
     > million users through… Medicare Part D pharmaceutical program.

Over the past decade, this mega-size (over $50B annual revenue) company has grown sales and earnings at annualized rates of 33.3% and 13.0%, respectively. Lines are mostly up and widening with EPS declines in ’18, ’20, ’21, and ’22. PTPM trails peer and industry averages while decreasing from 2.5% in ’13 to 1.4% in ’22 with a last-5-year mean of 2.0%.

Also over the past decade, ROE trails peer and industry averages while decreasing from 13.5% in ’12 to 4.5% in ’22 with a last-5-year mean of 7.2%. Debt-to-Capital is roughly equal to peer and industry averages while increasing from 35.1% in ’12 to 47.0% in ’22 with a last-5-year mean of 44.0%.

Interest Coverage is 6.5 and Quick Ratio is 1.1. Value Line gives a B++ rating for Financial Strength. M* gives a “Standard” rating for Capital Allocation and writes:

     > Overall, while the balance sheet appears weak to us, it is
     > improving and could reach sound territory in the near future if the
     > firm refrains from significant, leverage-increasing acquisitions.

Admittedly, I am not overly impressed to this point with CNC. While I believe it passes visual inspection (despite sales growing faster than EPS, which is not often seen), it’s not a leader and fundamental trends are negative.

With regard to sales growth:

• CNN Business projects 1.2% YOY growth and 2.7% per year contraction for ’23 and ’22-’24 (based on 18 analysts).
• YF projects YOY 2.5% growth and 6.4% contraction for ’23 and ’24, respectively (16 analysts).
• Zacks projects YOY 2.4% growth and 7.3% contraction for ’23 and ’24, respectively (7).
• Value Line projects annualized growth of 1.1% for ’22-’27.
• CFRA projects 2.8% YOY growth and 2.3% per year contraction for ’23 and ’22-’24, respectively.
• M* gives 2-year ACE of 1.7%/year contraction and projects “low single-digit growth” through 2026 in its analyst report.

My forecast is flat [below the range] over the next five years. This is also consistent with the widening visual inspection.

With regard to EPS growth:

• CNN Business projects 11.4% YOY and 7.2% per year for ’23 and ’22-’24, respectively (based on 18 analysts), along with 5-year annualized growth of 9.3%.
• MarketWatch projects 7.9% and 10.3% per year for ’22-’24 and ’22-’25, respectively (21 analysts).
• Nasdaq.com projects 2.5% YOY and 7.0% per year for ’24 and ’23-’25 (7, 10, and 4 analysts for ’23, ’24, and ’25).
• Seeking Alpha projects 4-year annualized growth of 8.2%.
• YF projects YOY 12.5% and 2.9% for ’23 and ’24, respectively (18), along with 5-year annualized growth of 10.6%.
• Zacks projects YOY 11.8% and 2.5% for ’23 and ’24, respectively (9), along with 5-year annualized growth of 11.2%.
• Value Line projects 10.0% per year from ’22-’27.
• CFRA projects 13.0% YOY and 7.9% per year for ’23 and ’22-’24, respectively, along with a 3-year CAGR of 9.0%.
• M* provides an annualized long-term ACE of 17.8% and projects 13.4% long-term growth in its analyst report.

I am forecasting below the long-term-estimate range (mean of six: 10.5%) at 8.0% per year. I will use ’22 EPS of $2.07/share as the initial value rather than 2023 Q2 EPS of $4.85 (annualized).

The latter is a pivotal judgment worthy of further discussion. $2.07/share continues the nascent downtrend from ’20 to ’21. The first two quarters of ’23, however, show sudden reversal and growth. Value Line reports consistent annual earnings growth over the past decade by excluding substantial “nonrecurrent” losses in ’16, ’18, ’19, ’20, ’21, and ’22. I question whether six out of seven years is “nonrecurrent” [CFRA seems to agree as “Normalized EPS”—often seen for other companies—is absent from this statistical matrix]. I should probably look at the 10-K’s to assess the “nonrecurrence” [if due to regular acquisitions, then M* suggestion to cut back on leverage-increasing purchases would require breaking an established pattern].

My Forecast High P/E is 27.0. Over the past decade, high P/E increases from 23.6 in ’14 to 47.6 in ’22 with a last-5-year mean of 32.8. The last-5-year-mean average P/E is 27.4. I am forecasting just below the latter.

My Forecast Low P/E is 21.0. Over the past decade, low P/E ranges from 11.9 in ’17 to 35.4 in ’22 with a last-5-year mean of 21.9. I am forecasting below the latter [aggressive since declining EPS over the last two years corresponds to inflated P/E].

My Low Stock Price Forecast (LSPF) of $43.50 is default based on $2.07/share initial value. This is 32.5% less than the previous close and 29.0% less than the 52-week low.

These inputs land CNC in the HOLD zone with a U/D ratio of 0.9. Total Annualized Return (TAR) is 5.3%.

PAR (using Forecast Average—not High—P/E) is 2.8%, which is less than the current yield on T-bills. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR although even that is less than the risk-free rate.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 121 studies (25 outliers and my study excluded) over the past 90 days, averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, and Forecast Low P/E are 6.0%, 13.4%, 23.8, and 15.5. My P/E range is higher but my growth rates are not. Value Line’s projected average annual P/E of 14.0 is lower than MS (19.7) and mine (24.0).

MS high / low EPS are $6.25 / $3.04 vs. my $3.04 / $2.07 (per share). My high EPS is lower partially due to a lower EPS growth rate. My high EPS is also lower than M* and Value Line at $3.88 and $9.30/share, respectively [a wide disparity also worthy of discussion].

MS LSPF of $52.70 implies a Forecast Low P/E of 17.3: greater than the above-stated 15.5. MS LSPF is 11.8% greater than the default $3.04/share * 15.5 = $47.12, which results in more aggressive zoning. MS LSPF remains 21.1% greater than mine.

My TAR (over 15.0% preferred) is far less than the 15.2% from MS. The latter is a direct result of MS high EPS and has nothing to do with LSPF.

MOS backing the current study seems almost excessive for two reasons [neither of which are P/E range]. First, my LSPF is much less than the 52-week low. For a stock trading near a 52-week low, maybe I need to reconsider the legitimacy of [overriding default and] discounting the previous closing price by 20-30%. An argument can be made to dissociate LSPF from a Forecast Low P/E, and I can always readjust later if needed. Second, I am using ’22 EPS rather than ’23 Q2 EPS as the initial value. That represents a significant haircut.

I track a few different valuation metrics. PEG is 0.9 and 1.5 per Zacks and my projected P/E, respectively: fairly valued, on average. Relative Value [(current P/E) / 5-year-mean average P/E] per M* is significantly low at 0.5. Kim Butcher’s “quick and dirty DCF” prices the stock at 11.0 * [$12.70 – ($0.00 + $2.80)] = $108.90: undervalued by 40.8%.

CNC is a BUY under $53/share. For TAR to meet my 15% criterion, I need closer to $41. My conservative approach sometimes represents a very high bar for stock picking.