Why Centene Corp. Shares Jumped

Centene delivers strong membership gains as both its profit and outlook top Wall Street's estimates. Can shares head even higher?

Sean Williams
Sean Williams
Apr 22, 2014 at 1:02PM
Health Care

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Centene (NYSE:CNC), a provider of managed care and specialty services within the U.S., vaulted higher by as much as 18% after reporting its first quarter results and updating its full-year guidance.

So what: For the quarter Centene, which predominantly caters to lower-to-middle income individuals and families on Medicaid, reported a 13% increase in managed care membership to 2.89 million, a 90 basis point drop in its health benefits ratio (a measure of margin where lower is better), and a 32% surge in revenue to $3.35 billion from the year-ago period. Along those same lines, Centene's profit jumped to $0.57 per share from $0.44 in the year-ago quarter. By comparison, Wall Street anticipated just $0.45 in EPS on $3.25 billion in revenue. Furthermore, Centene boosted its full-year revenue and EPS forecast to a range of $14.2 billion-$14.8 billion in revenue on $3.60-$3.90 in EPS. While revenue was on par with the Street, the current consensus of $3.62 for the year is at the low end of estimates. In other words, Centene's EPS midpoint offers modest upside to Wall Street's current full-year consensus.

Now what: Centene shareholders really couldn't have asked for a better quarter. Although the company picked up less than 40,000 health insurance market enrollees under the Affordable Care Act, its bread and butter has always been Medicaid and CHIP enrollments. For the quarter, compared to last year at this time, it added nearly 218,000 Medicaid members and 3,800 CHIP and foster care members, which should in some way be attributed to the Medicaid expansion under Obamacare. Although there is some uncertainty as to what might happen to these Medicaid-based insurers as the government looks for ways to reduce long-term spending, nearly every metric from this report would indicate that Centene is set up for long-term success.