CNC Stock Study (8-26-24)
Posted by Mark on October 16, 2024 at 06:47 | Last modified: August 26, 2024 07:27I recently did a stock study on Centene Corp. (CNC) with a closing price of $78.55. The previous study is here.
M* writes:
> Centene is a managed-care organization focused on government-
> sponsored healthcare plans, including Medicaid, Medicare, and
> the individual exchanges. Centene served 24 million medical
> members as of June 2023, mostly in Medicaid (67% of membership),
> the individual exchanges (14%), Medicare Advantage (6%), and
> the balance in Tricare (West region), correctional facility,
> and commercial plans. The company also serves traditional
> Medicare users with its Medicare Part D pharmaceutical program.
Over the past 10 years, the mega-size ( > $50B annual revenue) company has grown sales and earnings at annualized rates of 28.5% and 11.9%, respectively. Lines are somewhat up, straight, and parallel except for YOY EPS declines in ’18, ’20, ’21, and ’22 (recent year catches back up to previous trendline). Ten- (Five-) year EPS R^2 is 0.65 (0.05), but Value Line gives an Earnings Predictability score of 90.
Over the past decade, PTPM trails peer and industry averages while falling from 2.8% (’14) to 2.3% (’23) with a last-5-year mean of 2.0%. ROE also trails peer and industry averages while falling from 16.2% (’14) to 10.5% (’23) with a last-5-year mean of 7.5%. Debt-to-Capital is about even with peer and industry averages while increasing from 33.9% (’14) to 42.2% (’23) with a last-5-year mean of 44.8%.
Value Line gives a B++ grade for Financial Strength. Quick Ratio is 1.1 and Interest Coverage is 6.3 per M* who assigns a “Narrow” Economic Moat, “Standard” 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.
With regard to sales growth:
- YF projects YOY 1.1% and 3.6% for ’24 and ’25, respectively (based on 15 analysts).
- Zacks projects YOY 1.5% and 3.6% for ’24 and ’25, respectively (7 analysts).
- Value Line projects 2.2% annualized growth from ’23-’28.
- CFRA projects 10.3% YOY and 5.2% per year for ’24 and ’23-’25, respectively.
- M* provides a 2-year ACE of 2.8% growth per year.
My 2.0% per year forecast is near bottom of the range.
With regard to EPS growth:
- MarketWatch projects 7.3% and 8.9% per year for ’23-’25 and ’23-’26, respectively (based on 21 analysts).
- Nasdaq.com projects 8.9% YOY and 9.9% per year for ’25 and ’24-’26 ( 8 / 8 / 3 analysts for ’24 / ’25 / ’26 ).
- Seeking Alpha projects 4-year annualized growth of 7.9%.
- Argus projects 5-year annualized growth of 15.0%.
- YF projects YOY 2.5% and 7.9% for ’24 and ’25, respectively (16), along with 5-year annualized growth of 12.5%.
- Zacks projects YOY 2.4% and 8.2% for ’24 and ’25, respectively (7), along with 5-year annualized growth of 10.9%.
- Value Line projects 9.5% annualized growth from ’23-’28.
- CFRA projects 2.8% YOY and 6.1% per year for ’24 and ’23-’25, respectively and a 3-year CAGR of 8.0%.
- M* projects long-term growth of 14.3% (but only 9.0% per year through ’28 in its analyst note).
My 8.0% per year forecast is near bottom of the long-term-estimate range (mean of six using lower for M*: 10.8%). Initial value is ’23 EPS of $4.95/share rather than 2024 Q2 EPS of $5.27 (annualized).
My Forecast High P/E is 17.0. Over the past decade, high P/E ranges from 16.9 in ’23 to 47.6 in ’22 with a last-5-year mean of 29.6 and a last-5-year-mean average P/E of 24.8. I am near bottom of the range (only ’23 is less).
My Forecast Low P/E is 12.0. 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 20.2. I am forecasting near bottom of the range (only ’17 is less).
My Low Stock Price Forecast (LSPF) of $59.40 is default based on initial value given above. This is 24.4% less than the previous closing price and 2.3% less than the 52-week low.
These inputs land CNC in the HOLD zone with a U/D ratio of 2.4. Total Annualized Return (TAR) is 9.5%.
PAR (using Forecast Average—not High—P/E) of 6.1% is less than I seek for a mega-size company. If a healthy margin of safety (MOS) anchors the study, then I can proceed based on TAR instead.
To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on only 55 studies (my study and 18 outliers 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 4.5%, 10.0%, 22.0, and 14.0, respectively. I am lower across the board. Value Line’s projected average annual P/E of 13.5 is less than MS (18.0) and less than mine (14.5).
MS high / low EPS are $8.13 / $5.03 versus my $7.27 / $4.95 (per share). My high EPS is less due to a lower growth rate. Value Line’s $10.50 soars above both.
MS LSPF of $55.60 implies Forecast Low P/E of 11.0: less than the above-stated 14.0. MS LSPF is 21.5% less than the default $5.03/share * 14.0 = $70.42 resulting in more conservative zoning. MS LSPF is also 6.9% less than mine.
With regard to valuation, PEG is 1.1 and 1.7 per Zacks and my projected P/E, respectively: fairly valued. Relative Value [(current P/E) / 5-year-mean average P/E] is quite low at 0.60.
MOS is robust because my inputs are near or below respective analyst/historical ranges and MS averages. That is further supported by an MS TAR that is 9.9% per year greater than mine at 19.4%.
I approach Centene with hesitation because of its low sales growth and high debt load. M* comments like those included above are unusually sour. Value Line forecasts long-term debt to decrease by 38% over the next five years, which should help.
Per U/D, CNC is a BUY under $75/share. BI TAR criterion is met ~ $62/share given a forecast high price ~ $124 (no dividend).
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