AI Deployment And Medicaid Expansion Will Improve Healthcare Services And Operational Efficiency

Key Takeaways

• Centene's AI and data analytics deployment aims to enhance operational efficiencies, potentially boosting revenue and net margins.
  
• Strategic Medicare and Medicaid adjustments focus on revenue growth, improved margins, and enhanced member health outcomes.
  
• Insufficient Medicaid rate adjustments and risks from regulatory changes threaten to impact net margins, earnings, and future revenue growth.

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 modernization efforts through the deployment of AI and data analytics are expected to improve operational efficiencies and healthcare service quality, potentially enhancing revenue growth and net margins.
  
• The positive outcome of recent Medicare enrollment and projected program expansion in Medicaid are anticipated to lift 2025 revenue by $4 billion, which should support earnings growth.
  
• Successful rate negotiations and improved membership stability in Medicaid are expected to contribute to a return to targeted Medicaid margins, positively impacting net margins and overall earnings.
  
• Strategic realignment of the Medicare Advantage footprint alongside improved STARS ratings are set to enhance operational efficiency and enrollment, which may bolster future revenue and set a path towards breakeven in this segment by 2027.
  
• Integration of innovative care programs, such as telehealth initiatives and food-as-medicine approaches, aims to improve member health outcomes, possibly leading to lower medical costs and improved net margins over time.

Centene Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Centene's revenue will grow by 7.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 2.2% today to 1.9% in 3 years time.
• Analysts expect earnings to reach $3.5 billion (and earnings per share of $7.76) by about March 2028, up from $3.3 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.8x on those 2028 earnings, up from 8.8x today. This future PE is lower than the current PE for the US Healthcare industry at 24.0x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.77%, as per the Simply Wall St company report.

Centene Future Earnings Per Share Growth

Risks

• Medicaid rate adjustments in 2025 could be insufficient, potentially impacting net margins and earnings if the anticipated rate of 3% to 4% does not fully materialize, especially given the ongoing redetermination processes.
  
• Risks surrounding the Inflation Reduction Act and its changes to Medicare Part D could lead to unexpected costs or decreased profitability, thereby affecting net margins and future earnings.
  
• The assumption of stable marketplace retention and effectuation could be optimistic; unexpected attrition due to the subsidy verification process could reduce expected revenues and impact net margins.
  
• Execution risks in expanding programs like Ambetter Health and ICHRA may lead to slower than anticipated revenue growth or increased costs, directly impacting net margins and overall earnings.
  
• There are potential risks in obtaining higher Medicaid premium rates, as recent experience shows rate actions may not always be secured in alignment with cost trends, which could negatively impact future revenue and net margins.

Valuation

• The analysts have a consensus price target of $78.625 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 $93.0, and the most bearish reporting a price target of just $53.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $184.8 billion, earnings will come to $3.5 billion, and it would be trading on a PE ratio of 10.8x, assuming you use a discount rate of 6.8%.
• Given the current share price of $58.94, the analyst price target of $78.62 is 25.0% 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.