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What's Behind Centene's Disappointing Q1 Update

By Keith Speights - Apr 28, 2020 at 1:13PM

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The managed care company's revenue beat wasn't enough to overcome its lower-than-expected earnings and a relatively weak full-year outlook.

Coming into this week, Centene Corporation (CNC -0.39%) shareholders had to feel pretty good. Although the stock has more than 30% at one point in March with the overall stock market crash, Centene's shares had rebounded sharply and were up 12% for the year.

But that momentum was put in jeopardy as Centene announced its first-quarter results before the market opened on Tuesday. Here are the highlights from the managed care company's Q1 update.

A silver keyboard with a red key that says "1st quarter" on it.

Image source: Getty Images.

By the numbers

Centene reported Q1 revenue of $26 billion, a 41% jump from the $18.4 billion reported in the same quarter of the previous year. This result also handily beat the average analysts' revenue estimate of $24.3 billion.

The company announced net income in the first quarter of $46 million, or $0.08 per share, based on generally accepted accounting principles (GAAP). This reflected a steep decline from GAAP earnings of $522 million, or $1.24 per share, posted in the prior-year period.

Centene recorded adjusted net income in the first quarter of $476 million, or $0.86 per share. In the same quarter of 2019, the company generated adjusted net income of $585 million, or $1.39 per share. The consensus Wall Street estimate called for Q1 adjusted earnings of $0.99 per share.

Behind the numbers

Both the tremendous revenue growth and the sharp earnings decline for Centene in the first quarter were primarily caused by the same thing -- the company's acquisition of Wellcare Health Plans. This transaction closed on Jan. 23, 2020. 

There were other factors at work, though. Centene's Health Insurance Marketplace sales increased in Q1. The company also expanded in several states, especially in Iowa and Pennsylvania, boosting its revenue.

Centene's bottom line was certainly impacted by the higher expenses incurred with the Wellcare acquisition. However, the company's investment income fell due to a significant decline in interest rates. Its interest expense, though, rose because of a decision to defer the redemption of its senior debt securities maturing in 2022.

In addition, Centene's health benefits ratio (HBR), which measures medical costs as a percentage of premium revenue, increased to 88% in the first quarter from 85.7% in the prior-year period. This increase stemmed mainly from the growth of the company's Health Insurance Marketplace business.

Looking ahead

Centene expects that revenue for full-year 2020 will be between $110 billion and $112.4 billion. The company anticipates GAAP earnings per share (EPS) of $2.89 to $3.03, with adjusted non-GAAP EPS between $4.56 and $4.76. The midpoints of both ranges were below the consensus Wall Street estimates.

CEO Michael Neidorff acknowledged the impact of the COVID-19 pandemic, stating that "this is not a business as usual environment and economic recovery will be choppy." This choppiness could affect all healthcare stocks, including Centene.

However, the company recently had a couple of developments that should boost its revenue this year. Earlier this month, Centene's Centurion subsidiary won a contract to provide healthcare services to the Kansas Department of Corrections' facilities. The contract takes effect in July. Centene also began providing medical services, behavioral healthcare, and substance abuse treatment to four prisons and six community corrections centers in Delaware this month.

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