Earnings Roundup: Centene's Medicaid Miracle

Centene (NYSE: CNC  ) reported better-than-hoped results thanks to surging Medicaid enrollment tied to the launch of Obamacare last fall.

The private Medicaid insurer's results came after UnitedHealth Group  (NYSE: UNH  ) , the largest U.S. insurer, reported that Medicaid was its best growing insurance business last quarter.

Despite the highly publicized jump in Medicaid enrollment, investors were apparently caught flat footed. Shares soared more than 12% by mid-day. Given the big pop, let's take a closer look at Centene's first quarter results.

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A big bump to sales and earnings
Private Medicaid insurers like Centene do all the work behind the scenes for state Medicaid programs. States contract with providers like Centene, United Healthcare, and Molina (NYSE: MOH  ) to administer those programs, paying a fee based on the number of Medicaid members signed up in each state.

In the first quarter, membership in plans run by Centene climbed 13% to nearly 2.9 million people. 218,000 of those new members were covered by Centene's Medicaid plans. The significant hike in enrollees led to revenue climbing a third to $3.35 billion.

Even better, the costs associated with providing care to those Medicaid members fell. The medical care ratio, or MCR, declined by almost one percentage point from last year.

That led to earnings per share reaching $0.57, up from $0.44 last year, and nicely above Wall Street's pre-earnings expectations for $0.45.

Importantly, the results were strong enough to support Centene upping its full year revenue forecast to $14.2 billion to $14.8 billion. Overall, Centene expects earnings per share to total $3.60 to $3.90 this year. That's up from its earlier prediction of $13.8 billion to $14.3 billion in sales and $3.50 to $3.80 per share in earnings. Given the Street is expecting just $3.62, analysts are likely already updating their models to reflect the potential upside opportunity.

An industry-wide boom
According to the Center for Medicaid and Medicare Services, or CMS, 3 million people signed up for Medicaid following the launch of Obamacare last fall. That growth came in spite of many states opting out of the reform law's Medicaid expansion, which included increasing eligibility to those earning up to 138% of the federal poverty line.

That expansion means that the industry is enjoying the biggest gift since managed Medicaid was introduced in the 1980's.

The first quarter results will give investors additional clarity into how this jump in sales will translate into profit. The early read last quarter, which included new members added in the fourth quarter, was overwhelmingly positive.

At Molina, sales jumped to $1.7 billion in the fourth quarter, up from $1.58 billion a year ago. That lifted full year sales from $5.9 billion to $6.58 billion. While that's solid growth, sales this year should accelerate significantly.

In February, Molina updated its full year 2014 guidance. Molina expects sales to hit $9.9 billion, leading to EPS of between $4 and $4.5. If Molina can deliver on that forecast, it will mark a big improvement from the $3.13 the company posted in 2013.

So far signs suggest that the industry's growth will indeed impress. UnitedHealth Group told investors last week that while commercial enrollment in its plans slumped last quarter, Medicaid enrollment grew 10%. As a result, United's Medicaid revenue grew 17% to $5.2 billion.

Fool-worthy final thoughts
Private Medicaid is a low margin business. Operating margin at Centene and Molina is substantially lower than the much more diversified United Healthcare.

As a result, Centene's business is one uniquely driven by volume, and that's in no short supply this year following the enrollment pop. That suggests investors should continue to be rewarded throughout 2014.

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