Medicaid And Medicare Advantage Will Expand Health Care Access

Key Takeaways

• Medicaid business margin recovery and strong contract wins could enhance revenue growth and market share in government health programs.
  
• Improved Medicare Advantage outlook, alongside commercial segment growth, supports positive revenue and earnings prospects through operational efficiencies and increased membership.
  
• Policy reform challenges, high medical expenses, and specialty drug costs pose risks to margins and revenue growth if not effectively managed.

Catalysts

Operates as a healthcare enterprise that provides programs and services to under-insured and uninsured families, and commercial organizations in the United States.

• Centene's Medicaid business is expected to see margin recovery as rate adjustments align better with member acuity, which could improve Medicaid-related revenue and net margins.
  
• Overall strength and competitiveness in winning Medicaid contracts, such as the fully integrated D-SNP in Illinois and Medicaid expansion into rural Nevada, may drive future revenue growth and market share.
  
• Increased 2025 Medicare Advantage membership expectations, driven by higher retention rates, contribute to an upward revision in annual revenue, supporting earnings growth prospects.
  
• Plans to reach breakeven in the Medicare Advantage segment by 2027 are fortified by operational efficiencies, such as reductions in SG&A and enhancements in STARS ratings, potentially improving future net margins.
  
• Strong growth in the Commercial segment, primarily driven by higher-than-anticipated new enrollments and retention in Marketplace business, leads to a $5 billion increase in premium revenue guidance for 2025, which could bolster revenue and earnings.

Centene Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Centene's revenue will grow by 7.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 2.3% today to 1.9% in 3 years time.
• Analysts expect earnings to reach $3.6 billion (and earnings per share of $8.08) by about May 2028, up from $3.5 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.5x on those 2028 earnings, up from 8.6x today. This future PE is lower than the current PE for the US Healthcare industry at 19.7x.
• Analysts expect the number of shares outstanding to decline by 6.76% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.47%, as per the Simply Wall St company report.

Centene Future Earnings Per Share Growth

Risks

• Ongoing discussions around health care policy reform and the lack of broad support for major Medicaid reforms indicate potential challenges in securing favorable policy outcomes, which could impact revenue growth and net margins.
  
• The potential expiration of enhanced premium tax credits and complications related to the reconciliation process may affect the individual Marketplace's stability and future earnings if tax credits are not preserved.
  
• Influenza and influenza-like illnesses resulted in $130 million of unexpected medical expenses in Q1 2025 for Medicaid, highlighting potential volatility in medical costs that could adversely impact net margins.
  
• High specialty drug costs, especially in the non-low-income PDP members, present a financial risk driven by pharmaceutical industry behavior, potentially affecting future earnings and net margins if not adequately managed in future bids.
  
• Uncertainty surrounding Medicaid rate adjustments and ongoing discussions with state partners on rate adequacy could impact the state's ability to provide necessary rate increases and affect revenue growth and margin recovery efforts.

Valuation

• The analysts have a consensus price target of $77.844 for Centene based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $92.0, and the most bearish reporting a price target of just $61.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $191.4 billion, earnings will come to $3.6 billion, and it would be trading on a PE ratio of 10.5x, assuming you use a discount rate of 6.5%.
• Given the current share price of $59.68, the analyst price target of $77.84 is 23.3% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.