What’s Happening With Centene Stock?

Centene stock (NYSE: CNC) currently trades at $73 per share, roughly 25% below its pre-inflation peak level of $97 seen in August 2022, faring much worse than its peer – Molina Healthcare stock (NYSE: MOH) – which has largely traded sideways over this period. The recent fall in CNC stock can be attributed to its updated estimate of 13 million Medicaid members by the end of this year, versus its prior estimate of 13.6 million members. This will weigh on the overall premiums collected by the company. Lately, health insurance stocks have been struggling with rising medical costs. Centene has so far been more resilient than some of its peers with the medical costs ratio rising to 87.3% for the six-month period ending June 2024 versus 87.0% in the year-ago period. But the figure now is expected to deteriorate in the second half.

The changes in CNC stock over the last three-year period have been far from consistent, and the stock has largely been as volatile as the S&P 500. Returns for the stock were 37% in 2021, 0% in 2022, and -10% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is less volatile. And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment around rate cuts and multiple wars, could CNC face a similar situation as it did in 2023 and underperform the S&P over the next 12 months — or will it see a strong jump? Returning to the pre-inflation shock level means that CNC stock will have to gain 33% from here. While this may not happen anytime soon, CNC stock appears to have some room for growth. It is trading at 0.2x revenues, compared to its average P/S ratio of 0.3x seen over the last three years. Notably, the $86 average analyst price estimate reflects a roughly 20% upside potential from the current levels of $73.

Our detailed analysis of Centene’s upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022. It compares these trends to the stock’s performance during the 2008 recession.

2022 Inflation Shock

Timeline of Inflation Shock So Far:

• 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers unable to match up.
• Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt supply
• April 2021: Inflation rates cross 4% and increase rapidly
• Early 2022: Energy and food prices spike due to Russian invasion of Ukraine. Fed begins its rate hike process
• June 2022: Inflation levels peak at 9% – the highest level in 40 years. S&P 500 index declines more than 20% from peak levels.
• July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline
• October 2022 – July 2023: Fed continues rate hike process; improving market sentiments help S&P500 recoup some of its losses
• Since August 2023: Fed has kept interest rates unchanged to quell fears of a recession but points to potential rate cuts in 2024.

In contrast, here’s how CNC stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

CNC and S&P 500 Performance During 2007-08 Crisis

CNC stock declined from $6 in August 2008 (its pre-crisis peak) to around $4 in March 2009 (as the markets bottomed out), implying that it lost over 25% of its pre-crisis value. It recovered after the 2008 crisis to levels of around $5 in early 2010, rising nearly 25% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.

CNC Fundamentals Over Recent Years

Centene’s revenues rose from $111 billion in 2020 to $154 billion in 2023, primarily due to the acquisition of WellCare and higher enrollments in the Medicaid business. The company’s total membership rose to 27.5 million in 2023, vs. 25.5 million in 2020. However, its operating margin has contracted from 2.8% to 2.2% over the same period. Centene’s reported earnings increased from $3.12 in 2020 to $4.95 in 2023.

Does CNC Have A Sufficient Cash Cushion To Meet Its Obligations Through The Ongoing Inflation Shock?

Centene’s total debt increased from $17 billion in 2020 to $18 billion now, while its total cash increased from around $12 billion to $20 billion over the same period. The company garnered $3 billion in cash flows from operations in the last twelve months. Given its solid cash position, Centene appears to be in a comfortable position to meet its near-term obligations.

Conclusion

With the Fed’s efforts to tame runaway inflation rates helping market sentiment, we believe Centene (CNC) stock has the potential for gains once fears of a potential recession are allayed. We believe that investors can use the current dip in CNC for robust gains in the long run. That said, any significant rise in medical costs due to the increase in elective procedures remains a risk factor for realizing these gains.

While CNC stock may see higher levels over time, it is helpful to see how Centene’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 9/5/2024
[2] Cumulative total returns since the end of 2016

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