09-20-2017: Centene Corporation: (CNC): Rapid Growth Through Acquisitions

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Centene Corporation

Centene Corporation (CNC) works closely with the Federal and various state governments to administer health insurance programs offered through government. It focuses on disadvantaged uninsured individuals. It is based in St. Louis and has gradually spread out from the midwest to adminster programs for states coast to coast. Increases in numbers of individuals covered and contracts with states are key growth factors where this company has done very well.

But the first thing to jump out at us was executive compensation. The CEO is one of the most highly and exhorbitantly paid CEO's on the planet. Although the company has a good website and good management reporting, there was no CEO Letter to Shareholders and the company gets low Pillar (governance) scores for compensation, who is on the Board, and "shareholder rights" (which generally means lack of concern for shareholders and poison pill provisions to prevent a takeover.)

The corporation expands mainly by acquiring smaller Healthcare HMO organizations that already have contracts with states. Opportunities are where the Affordable Healthcare Act priced out every other insurer in a given area (such as Missouri).

Analysts are favorable, researchers more apt to be neutral, and institutions are net sellers but Dimensional Fund Advisors is among holders which we regard as a good sign.

A recent acquisition (Fidelis) has given the corporation a large presence in New York State and an acquisition not so long ago gave it a large presence in California.

The stock chart pattern is definitely "buy and hold" with little opportunity for in-and-out trading. However, that may be about to change. The corporation itself mentions chief among risk factors uncertainty about how the U.S. Government will restructure and Affordable Healthcare Act, or whether it will be able to act at all. Optimism here has been propelling healthcare stocks which may now all start seeing brakes applied.

Recent stock price moves appear to be downward filling a gap. Sage advice from the second of our three "Ultimate Systems" is, "Since the short term trend is down, look for demonstrated price strength before getting too bullish here."

The corporation had one particularly bad year in 2012, distorting valuations somewhat, followed by somewhat erratic growth patterns but solid earnings nonetheless. The corporation has outstanding cash flow.

Something we wonder about is as Centene builds its subscriber base through acquisition of troubled healthcare maintenance organization plans, there is a reason like organizations such as Fidelis in New York State were more or less "up for grabs." While states furnish certain "guarantees" against losses to entities managing their plans to make affordable healthcare available, these guarantees were most likely offered to predecessors as well. Why were they failing? What can Centene do differently?



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Zenith Index

Under current market conditions, a Zenith Index Score of 1.20 or above is required for a positive rating on this factor. 1.21 -1.30 is considered acceptable, 1.30-1.40 is considered strong and
> 1.40 is considered exceptionally strong. Accounting statements in this section often contain mistakes, especially in earlier years' totals, but data is deemed sufficient for us to give a rating. More accurate financial statements follow in the next section.

Centene Corporation (CNC)                                 Exchange: NYSE
Centene Plaza
7700 Forsyth Boulevard           Sector: Healthcare
St. Louis, MO 63105              Industry:Health Care Plans

Centene Corporation operates as a diversified and multi-national
healthcare enterprise that provides programs and services to
under-insured and uninsured individuals in the United States. It
operates through two segments, Managed Care and Specialty Services. The
Managed Care segment offers Medicaid and Medicaid-related health plan
coverage to individuals through government subsidized programs,
including Medicaid, the State children-Ęs health insurance program,
long-term care, foster care, and dual-eligible individual, as well as
aged, blind, or disabled programs. Its health plans include primary and
specialty physician care, inpatient and outpatient hospital care,
emergency and urgent care, prenatal care, laboratory and X-ray services,
home health and durable medical equipment, behavioral health and
substance abuse, 24-hour nurse advice line, transportation assistance,
vision care, dental care, immunizations, prescriptions and limited
over-the-counter drugs, specialty pharmacy, therapies, social work
services, and care coordination. The Specialty Services segment provides
pharmacy benefits management services; health, triage, wellness, and
disease management services; vision services; dental services;
correctional healthcare services; in-home health services; and
integrated long-term care services, as well as care management software
that automate the clinical, administrative, and technical components of
care management programs. This segment offers its services and products
to state programs, healthcare organizations, employer groups, and other
commercial organizations. The company provides its services through
primary and specialty care physicians, hospitals, and ancillary
providers. Centene Corporation was founded in 1984 and is headquartered
in St. Louis, Missouri.

Last Trade:  95.98                           52-Week Range:  98.72 -  50.00
Employees: 30,500                            Avg.Volume:   1,443,350 Shares

Corporate Governance:
Pillar scores are Audit: 1; Board: 8; Shareholder Rights: 9; Compensation: 9.
         (A lower number means less governance risk.)

EPS:  4.56    Dividend Amount: $ 0.00          Yield:  0.00%
             Ex-Dividend Date: N/A             Payout Ratio:   0.00

Key Statistics:

    Trailing P/E:  20.93              Forward P/E (est.):  17.46
                                           Target Price: 102.07

Qrtly Stock Price Growth (yoy):  42.36%               Beta:   0.91
Qrtly S&P Index   Growth (yoy):  11.40%        Short Ratio:   1.82%
    Qrtly Revenue Growth (yoy):  16.88%         Shares Out:  172480000
   Qrtly Earnings Growth (yoy):   0.00%

          Book Value:  36.98                    Debt/Equity:  73.12%
    Price/Book Value:   2.58        Operating Profit Margin:   4.23%
         Price/Sales:   0.38                  Profit Margin:   1.83%
         Market Cap:  16,446,000,000       Return on Equity:  12.87%
    Enterprise Value:               0      Return on Assets:   5.58%

    Operating Cash Flow:  3,020,000,000
         Free Cash Flow:  1,980,000,000




Annual Income Statement:                          (All numbers in thousands)
  Period Ending                             12/31/2016  12/31/2015  12/31/2014

  Total Revenue                             40,607,000  22,760,000  16,560,000
  Cost of Revenue                           30,636,000  17,242,000  12,678,000
  Gross Profit                               9,971,000   5,518,000   3,882,000

Operating Expenses:
  Research & Development                             0           0           0
  Selling, General & Administrative          6,239,000   2,953,000   1,996,000
  Non-Recurring Expenses                             0           0           0
  Other Operating Expenses                   2,472,000   1,860,000   1,422,000
  Total Operating Expenses                           0           0           0

Operating Income or Loss                     1,260,000     705,000     464,000

Income from Continuing Operations:
  Total Other Income/Expenses Net              114,000      35,000      28,000
  Earnings Before Interest & Taxes           1,374,000     740,000     492,000
  Interest Expense                             217,000      43,000      35,000
  Income Before Taxes                        1,157,000     697,000     457,000
  Income Tax Expense                           599,000     339,000     196,000
  Minority Interest                             14,000      11,000      -1,000

Net Income from Continuing Op.s                558,000     358,000     261,000

Non-recurring Events:
  Discontinued Operations                        3,000      -1,000       3,000
  Extraordinary Items                                0           0           0
  Effect of Accounting Changes                       0           0           0
  Other Items                                        0           0           0
  Net Income                                   562,000     355,000     271,000
  Preferred Stock & Other Adjustments                0           0           0

Net Income Avail to Common Shares              562,000     355,000     271,000




Annual Cash Flow Statement:                   (All numbers in thousands)
  Period Ending                         12/31/2016    12/31/2015    12/31/2014

  Net Income                               558,000       358,000       261,000

Operating Activities:
  Depreciation                             278,000       111,000        89,000
  Adjustments to Net Income                228,000        48,000         6,000
  Changes in Accounts Recv'bls              74,000      -360,000      -463,000
  Changes in Liabilities                   529,000       599,000     1,333,000
  Changes in Investories                         0             0             0
  Changes in other Oper'g Acts             181,000       -97,000        -6,000

Total Cash Flow f Operations             1,851,000       658,000     1,223,000

Investing Activities:
  Capital Exenditures                     -306,000      -150,000      -103,000
  Investments                             -794,000      -652,000      -609,000
  Other Cash Flows fr Investing         -1,297,000       -11,000      -136,000

Total Cash Flows from Investing         -2,397,000      -813,000      -848,000

Financing Activities:
  Dividends Paid                                 0             0             0
  Sale of Purchase of Stock                -63,000       -53,000       -29,000
  Net Borrowings                         2,794,000       338,000       194,000
  Other Cash Flows fr Financing            -14,000        20,000      -136,000

Total Cash Flows from Financing          2,717,000       305,000       198,000

  Effect of Exchange Rate Chg               -1,000        -1,000        -1,000

Change in Cash & Cash Equiv.             2,170,000       150,000       572,000




Annual Balance Sheets:                              (All Numbers in Thousands)
  Period Ending                          12/31/2016    12/31/2015    12/31/2014
Current Assets:
  Cash & Cash Equivalents                 3,930,000     1,760,000     1,610,000
  Short Term Investments                    505,000       176,000       177,000
  Net Receivables                         3,098,000     1,279,000       912,000
  Inventory                                       0             0             0
  Other Current Assets                            0             0             0
  Total Current Assets                    8,543,000     3,039,000     2,522,000

  Long-Term Investments                   4,683,000     2,042,000     1,380,000
  Property, Plant & Equipt                  797,000       518,000       445,000
  Goodwill                                4,712,000       842,000       754,000
  Intangible Assets                       1,545,000       155,000       120,000
  Accumulated Amortization                        0             0             0
  Other Assets                              927,000       567,000       426,000
  Deferred LT Asset Charges                       0             0             0

Total Assets                             20,197,000     7,339,000     5,824,000

Current Liabilities:
  Accounts Payable                        4,377,000     1,183,000     1,004,000
  Current Portion LT Debt                     4,000         5,000         5,000
  Other Current Liabilities                       0             0             0
  Total Current Liabilities               4,381,000     1,188,000      1,009,000

  Long Term Debt                          4,377,000     1,183,000     1,004,000
  Other Liabilities                           4,000         5,000         5,000
  Deferred LT Liab. Charges                       0             0             0
  Minority Interest                          14,000        11,000        -1,000
  Negative Goodwill                          14,000        11,000        -1,000

Total Liabilities                        14,605,000     5,095,000     4,173,000

Stockholder Equity:
  Misc. Options, Warrants                   145,000       156,000       148,000
  Redeemable Preferred Stock                      0             0             0
  Preferred Stock                                 0             0             0
  Common Stock                                    0             0             0
  Retained Earnings                       1,920,000     1,358,000     1,003,000
  Treasury Stock                           -179,000      -147,000       -98,000
  Capital Surplus                         4,190,000       956,000       840,000
  Other Stockhohlder Equity                 -36,000       -10,000        -1,000
  Total Stockholder Equity                5,895,000     2,157,000     1,744,000

Net Tangible Assets                        -362,000     1,160,000       870,000



Centene Corporation (CNC)                   [Indices near +3.0, near zero,
                                            or < zero bear special attention.]
P/E Ratio Tests:
P/E Ratio < 28?            1.3378          P/E Ratio > 5?             1.0000
P/E Ratio Vs Growth Rate:  0.0000          Forward P/E Ratio < 28?    1.6037
Price/Sales Ratio < 2.3?   3.0000          Inventory/Sales < 5%?      1.0000
Sales < $1 Billion?        0.0246          Operating Margin < 7.5%?   1.7730

Balance Sheet Tests:
Debt/Equity < 0.40?        0.5470          Long-Term Debt Service:    1.0613
LTD Being Reduced?        -3.0000          Short-Term Debt Service:   3.0000
Current Ratio > 2?         0.9750          Working Capital >= 1.5?    0.7795
Leverage Ratio < 20%?      0.3243          Debt/Assets < 1?           3.0000
Quick Ratio > 1?           3.0000          Inventory Turnover > 1?    1.0000
Share Equity Increase:     3.0000          Market Cap.< 1.5 Billion?  0.0912
                                           Intangibles < 3% Assets?   0.0968
Income Tests:
Profit Margin < 7.5%?      0.2440          EPS Annual Growth > 10%?   0.0632
Dividend Yield > 2.0%?     0.0000          EPS 3-yr Growth > 15?      0.0723
Enterprise Value/Revenue   0.4050          EPS Growth Consistent?     2.0000
Enterprise Value/EBITDA:   3.0000          Collection < 45 days?      1.6160
EPS Qrtly Growth > 10%?    0.0000          Gross Pft/Cur. LTD > 1?    3.0000
                                           Borrowing Int. Rate < 6%?  1.4569
Stock Performance Tests:
Volatility > 25%?          1.9741          % Held by Insiders < 5%?   1.6181
Beta > 1.25?               0.7280          % Held by Institut. < 50?  0.5244
50 Da MA > 200 Da MA?      0.2485          % Held by Institut. > 30?  3.0000
52-Wk Change vs. S&P 500:  2.5095          Short Ratio > 5?           0.3640
Price/Book Value < 3?      1.1559          Short % of Float > 20?     0.0930
Return on Assets > 17%?    0.3282          Average Volume > 100,000?  3.0000

Cash Flow Tests:
Oper. C.F. > Lever'd C.F:  1.5253          Positive Free Cash Flow?   3.0000
Positive Oper. Cash Flow?  3.0000          Price to C.F.Ratio < 14?:  3.0000
                                           Cash Flow / Assets > 10%?  3.0000

CNC    Centene Corporation                 Overall Zenith Index:      1.3174


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Income Statement:

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Average to Current P/E Ratios
              (CNC)     Centene Corp.

                               2012    2013    2014    2015    2016

          Annual Earnings:     0.02    1.47    2.25    2.88    3.43
Average Price During Year:    20.03   25.94   36.32   64.60   63.96

                P/E Ratio:   %1001.69   17.65   16.14   22.43   18.65

 Average 5-Year P/E Ratio  = 215.31
             Current Price =  94.58

Previous 5 Quarter Earnings:   0.97    0.83    1.49    0.79    1.44

           Current Annualized (Last Four Quarters) Earnings =  3.72
                                                           ________
                                 Average PE / Current PE =     8.47
                                                           --------

                                      ...a number above 1.00 is good
                                                1.00 or below is bad


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The summary below includes a value for `Degree,' which refers on a
scale of 1 to 10 the range of a channel in the period under consi-
deration compared to the total range of price movement. It also looks
for the last closing price to be within the channel, otherwise zeroed.
The `Index' is the `Degree' weighted for volatility.  Generally, the
the higher the index, the more suitable is the stock for trading as
a `rolling stock' between channel high and low points.

Results for CENTENE CORPORATION:
Symbol? CNC
Total Months Available:  72
       Months in Cycle?   4

Months Covered by Periods:  12

Period 1           Period 2          Period 3
   H1      L1        H2      L2        H3      L3
  69.60   50.00     77.60   61.37     98.71   72.14

RANGE   =  98.71  TO   50.00            Close =  95.98
CHANNEL =  72.14  TO   69.60           Degree =   1
Volatility =   2.65%                    Index =   0
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4 out of 8 favorable, (neutral opinion.)

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Recommendation

Decision Weighting Factors
FactorsWeighted Points
News + 1
Comparison - 1
Industry + 1
Bond Issue + 1
Zenith Index + 1
Non-GAAP vs. GAAP Earnings - 1
Cash Flow + 1
Average to Current P/E + 1
Ratios + 1
Market Grader - 1
Intrinsic Value DCF - 1
Tangible Book Value - 1
Projected Earnings + 1
Research Reports + 1
Analysts + 1
Executive Perquisites - 1
Insider Activity - 1
Institutional Activity - 1
Management Reporting + 1
Short Interest - 1
Sentiment + 1
Standard & Poor's - 1
Moving Average + 1
Right Time Study + 1
MACD Histogram Divergence + 1
Val Idea 0
Stock Consultant + 1
Point & Figure + 1
Wall Street Analyzer + 1
Marketspace Chart + 1
Time Series Chart - 1
Neural Network - 1
Stock Options + 1
Ultimate Trading Systems - 1
Total + 7
Place 315 shares of Centene Corporation (CNC) on the Active List.