Centene Corporation (CNC) is a health insurance company that provides government-sponsored healthcare programs to under-insured individuals. It is acquiring HealthNet, which will expand its Medicaid membership to 11 million across 23 states. The acquisition is expected to close in June 2016 and provide significant revenue growth and cost synergies. Centene has a diversified business model across government programs and geographies. It has achieved strong revenue and earnings growth through acquisitions and expansion into new markets. The analyst recommends buying CNC with a target price of $79.8 based on the company's steady growth prospects and undervaluation.

1. Centene Corporation
CNC
University of California, Berkeley
Advaita Patel, Amy Hu, Nichanan Kesonpat, Vanessa Guo
“Better Health Outcomes at Lower Costs”

2. Introduction & Investment Thesis
Company: Centene Corporation
Ticker: CNC (NYSE)
Current Price (Nov. 25 Close): $56.76
52-week range: $48.08 - 83.00
Recommendation: BUY
Target 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

3. 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 solutions
2015: 23 states, 2 intl’ markets, 226 solutions
Revenue GeneratorsOverview
● 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

4. 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

5. 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

6. Barriers to entry
HIGH
Substitutes
LOW
Buyer power
NOT INTENSE
Rivalry
NOT 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

7. ● 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

8. ● 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

9. 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

10. 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

11. 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 6.81
Operating 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

12. Company: Centene Corporation
Ticker: CNC (NYSE)
Current Price (Nov. 25 Close): $56.76
Recommendation: BUY
Forecast Range: $60.6-101.6
Target Price: $79.8
2014 2013 2012 2011
Diluted EPS 2.23 1.43 0.82 1.115
Year-end price 51.92 29.48 20.5 19.8
P/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

13. 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 166.452 241.28 301.6 392.08 509.704
Plus 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 0.0005
Change 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

14. 1. Estimating Beta
2. Capital Asset Pricing Model
Company Beta (L) Tax Rate Beta (U)
Centene 1.11 0.48 1.01
Molina 1.84 0.5734 1.65
WellCare 1.34 0.61 1.18
Magellan 0.42 0.6125 0.39
Mean 1.1775 0.568975 1.0575
Median 1.225 0.5917 1.095
Risk Free Rate 2.25
Market Risk Premium 6
Beta 1.11
Cost of Equity 8.91
WACC Perpetuity Growth Rate
1.00 2.00 2.50 3.00 3.50
4.56 783.02 637.40 2368.0 3573.8 5917.0
5.56 611.31 553.09 1594.2 2177.7 3044.6
6.56 501.36 488.47 1201.5 1566.0 2049.6
7.56 424.93 437.38 964.08 1222.6 1544.8
8.56 368.72 395.96 804.99 1002.7 1239.5
3. Estimating WACC
Cost of Equity 8.91%
Total Equity ($ million) 1,744
Cost of Debt 3.64%
Total Debt ($ million) 879
Corporate Tax Rate 48%
WACC 6.56
Discounted Cash Flow

15. 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

16. Q&A

17. Appendix

18. Balance Sheet
5-year Stock Performance

19. Income Statement

20. Cash Flow Statement

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