Centene CorporationCNC

University of California, Berkeley

Advaita Patel, Amy Hu, Nichanan Kesonpat, Vanessa Guo

“Better Health Outcomes at Lower Costs”

Introduction & Investment Thesis

Company: Centene CorporationTicker: CNC (NYSE)Current Price (Nov. 25 Close): $56.7652-week range: $48.08 - 83.00

Recommendation: BUYTarget Price: $79.8

1. Steady Growth via acquisitions and expanding into International Locations

2. Diversification of revenue by moving into other markets and new product lines

3. Industry Leader with industry leading 5-year CAGR and low P/E

Source: Google Finance

CNC YTD Stock Performance

Leadership

Management: - Michael F. Neidorff, Chairman, President & CEO- William N. Scheffel, CFO, Treasurer & Executive VP - Donald G. Imholz, CIO & EVP-Operations- Ken Yamaguchi, CMO & Executive VP

Partnerships

2008: 8 states, 70 solutions2015: 23 states, 2 intl’ markets, 226 solutions

Revenue Generators Overview

● Provide health insurance solutions for the underinsured and uninsured

● Medicaid, Medicare, Health Insurance Marketplace (HIM) and other Health Solutions through specialty services companies

● Works with over 4.8 million members across 23 states to deliver healthcare locally

● By delivering quality healthcare locally, provide accessible, high quality and culturally sensitive healthcare.

● Customized solutions for partners to address distinct needs

Company Overview

Source: Yahoo Finance

Share Price (Nov. 25 Close): $56.76- Q3 premium and service revenue ↑31% compared to last year's quarter (expansions/new programs in partner states)

- Business Expansion & Contraction costs are decreasing as a percentage of Premium & Service Revenues

- Q3 profit ↑13% from last year's quarter (higher revenue, increased membership)

- Revenue ↑34% in the recent quarter

Premium & Service Revenue Growth

Adjusted EBITDA ($ in millions)

Company Overview: Financials

Macroeconomic Highlights

US Markets ● The aging population of Baby Boomers expected to increase● GDP and household incomes are increasing steadily ● Obamacare requires Americans to have health insurance

International Markets ● UK and Spain have Universal Health Care ● Government spending and regulations

● Many more mergers and acquisitions including Aetna acquiring Humana and Anthem acquiring Cigna

● Investors have a positive response to Affordable Care Act ● Companies are shifting to a more consumer-oriented mindset ● The new emphasis is on the quality over the quantity of

healthcare

Industry Highlights

Industry Overview

Barriers to entry HIGH

Substitutes LOW

Buyer powerNOT INTENSE

RivalryNOT INTENSE

Supplier power RELATIVELY HIGH

Centene is favorable in the

industry.

Barriers to entry: ● Large established corporations ● Regulations in different states ● Government regulations

Substitutes:● Other private

companies● Other Medicare or

Medicaid providers● No healthcare

insurance

Buyer Power: ● Other healthcare

insurance companies

● Other Medicare or Medicaid providers

Rivalry: ● Centene (w/HealthNet): 23

states; 11 million users● Amerigroup: 26 states; 7.7

million users ● Molina: about 10 states;

3.5 million users ● Wellcare: about 7 states;

2.2 million users

Supplier Power: ● Those that supply

Centene’s materials and resources

● Hospitals, healthcare clinics, healthcare provider centers

● State and federal governments

Porter’s Five Forces Analysis

● Managed Care accounts for 89% of the revenue

● Centene’s medicaid risk-based memberships are widely spread throughout the US

● Centene’s medicaid services increased 9.5 times over the last decade

Growing Medicaid Market

Steady Growth - Medicaid Enrollment

● An estimated growth of 1.7M Medicaid Members ● Expand Medicaid - Acquisition would result in

becoming the largest Medicaid Player● Significantly improve Medicare● Estimated of 75% growth in Revenue● Transaction expected to close in June, 2016

Prospective Benefits

Upcoming Acquisition

Centene’s strategies

● Started to add on services through federal and state-based public health insurance exchanges

● Entered international market in 2014● Increased membership across lines of business

Product Diversification

Membership by Line of Business

Product & Geographic Diversification

Industry leader 5-Year Compounded Annual Growth Rate for EPS and Premium & Service Revenue

Lowest P/E despite high growth potential and industry leading EPS- undervalued at $57

Valuation

Source: Yahoo Finance

CNC MOH WCG MGLN Industry

Market Cap: 6.77B 3.39B 3.64B 1.31B 5.03B

Employees: 13,400 10,500 6,700 6,600 20.00K

Qtrly Rev Growth (yoy): 0.31 0.46 0.01 0.29 0.18

Revenue (ttm): 19.85B 12.73B 13.81B 4.31B 19.85B

Gross Margin (ttm): 0.19 0.14 0.13 0.06 0.2

EBITDA (ttm): 853.00M 489.89M 447.80M 208.11M 853.00M

EV/EBITDA (ttm): 7.32 1.53 7.02 6.81Operating Margin (ttm): 0.04 0.03 0.03 0.03 0.05

Net Income (ttm): 350.00M 147.30M 113.40M 25.69M N/A

EPS (ttm): 2.87 2.76 2.55 0.97 2.76

P/E (ttm): 19.76 21.88 32.35 53.72 23.12

PEG (5 yr expected): 1.31 0.67 1.28 -5.76 1.25

P/S (ttm): 0.34 0.27 0.26 0.31 0.47

Return on Equity (ttm) 17.54% 11.87% 6.89% 2.10% 14.40%

Valuation

Company: Centene CorporationTicker: CNC (NYSE)Current Price (Nov. 25 Close): $56.76

Recommendation: BUYForecast Range: $60.6-101.6

Target Price: $79.8

2014 2013 2012 2011Diluted EPS 2.23 1.43 0.82 1.115

Year-end price 51.92 29.48 20.5 19.8P/E 23.3 20.6 25 17

3. Share Price Forecast

2. P/E History

Current EPS 2.85

Current Price 56.76

Current P/E 19.76

13-14 EPS Growth 56%

EV/EBIDTA 7.32

1. Valuation & Metrics Low Medium High

EPS Growth 25% 40% 55%

New EPS 3.5625 3.99 4.4175

P/E 17 20 23

Share Price 60.5625 79.8 101.6025

New/Old Price 107% 141% 179%

Valuation - EPS Growth Method

Historical Projected

Year 1 (2012) Year 2 (2013) Year 3 (2014) Year 4 (2015) Year 5 (2016) Year 6 (2017)Revenue ($ million): 8,110.30 10,863.33 16,560.00 21,528.00 27,986.40 36,382.32

Revenue Growth Rate: 35.74% 25.34% 34.40% 30.00% 30.00% 30.00%Operating Income (EBIT) ($ million): 107.97 277.42 464.00 603.20 784.16 1,019.41

Operating (EBIT) Margin: 1.33% 2.55% 2.80% 3.00% 3.00% 3.00%Tax Rate 38.50% 40.00% 48.00% 50.00% 50.00% 50.00%

Net Operating Profit After Taxes (NOPAT) 66.40155 166.452 241.28 301.6 392.08 509.704Plus Depreciation & Amortization ($ million): 0.06587 0.06742 0.089 10.764 13.9932 18.19116

% Revenue: 0.00081 0.00062 0.00053 0.0005 0.0005 0.0005Change in Operating Assets & Liabilities ($ million): 246 184 781 645.84 839.592 1091.4696

% Revenue: 3.03% 1.69% 4.72% 3.00% 3.00% 3.00%Less: Capital Expenditures: -82 -68 -103 -133.4736 -173.51568 -225.570384

% Revenue: -1.01% -0.63% -0.62% -0.62% -0.62% -0.62%Unlevered Free Cash Flow 230 283 919 824.7 1072.1 1393.7

Discounted Cash Flow

1. Estimating Beta

2. Capital Asset Pricing Model

Company Beta (L) Tax Rate Beta (U)Centene 1.11 0.48 1.01Molina 1.84 0.5734 1.65

WellCare 1.34 0.61 1.18Magellan 0.42 0.6125 0.39

Mean 1.1775 0.568975 1.0575Median 1.225 0.5917 1.095

Risk Free Rate 2.25Market Risk Premium 6Beta 1.11Cost of Equity 8.91

WACC Perpetuity Growth Rate

1.00 2.00 2.50 3.00 3.504.56 783.02 637.40 2368.0 3573.8 5917.05.56 611.31 553.09 1594.2 2177.7 3044.66.56 501.36 488.47 1201.5 1566.0 2049.67.56 424.93 437.38 964.08 1222.6 1544.88.56 368.72 395.96 804.99 1002.7 1239.5

3. Estimating WACC

Cost of Equity 8.91%Total Equity ($ million) 1,744Cost of Debt 3.64%Total Debt ($ million) 879Corporate Tax Rate 48%WACC 6.56

Discounted Cash Flow

Post Acquisition

Performance

Competition

Regulation

● The merge between two corporations will take time and effort on not just Centene but also hospitals, consumers, and other users of Centene and HealthNet. With any merger or acquisition, there will be conflict initially and then with time, all the services and conflicts will be smoothed out.

● The acquisition would result in Centene taking in $500 million in debt. However, the number of users is expected to increase to 11 million and an estimated service revenue of $9.2 billion.

● Other companies are continuously growing by additional mergers and acquisitions. With this upcoming acquisition, Centene poses as a real competitor to other large healthcare insurance companies such as UnitedHealth, Aetna, or Anthem.

● Centene looks towards expanding its own products and services into vision, dentistry, and foster care. ● Centene has already expanded into the United Kingdom and Spain to work internationally as well.

● Different states choose their own coverage. Centene successfully sued Kentucky over misleading information during the bidding process. However, Centene has already partnered with Massachusetts’s Correctional Facilities to provide additional coverage to those in the facilities.

● Affordable Care Act increases health care coverage across the United States for all people. This forces more people to look into Medicare and Medicaid for health care coverage when it is needed.

Risks & Mitigating Factors

Q&A

Appendix

Balance Sheet

5-year Stock Performance

Income Statement

Cash Flow Statement

Centene and Health Net merger: presentation at the Wells Fargo Healthcare conference in Sept ‘15http://www.centene.com/wp-content/uploads/2015/09/WellsFargoHealthcareConf09092015.pdf

June 2015 Investor Day presentationhttp://www.centene.com/wp-content/uploads/2015/07/June2015InvestorDay.pdf

Analyst Estimates comparing CNC to industry and sector (Yahoo Finance)http://finance.yahoo.com/q/ae?s=CNC+Analyst+Estimates

News on the health care plans sector http://biz.yahoo.com/ic/news/522.html

Press release of third quarter earningshttp://phx.corporate-ir.net/phoenix.zhtml?c=130443&p=irol-newsArticle_Print&ID=2102543

https://www.thelundreport.org/content/centene-corp-readies-take-over-health-net 11/20

http://www.thestreet.com/files/r/ratings/equities/CNC_weiss.pdf

http://pages.stern.nyu.edu/~adamodar/New_Home_Page/valquestions/acqcapex.htm