How Did Centene’s Geographical Diversification Strategy Boosts Pan out for Its 4Q15 Earnings?



Centene’s 4Q15 takeaways

Centene Corporation (CNC) posted its 4Q15 and 2015 earnings on February 09, 2016. The company reported diluted operating EPS (earnings per share) attributable to common shareholders of about $2.89 in 2015, which includes a negative impact of $0.14 expense related to a pending merger with Health Net (HNT).

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Diluted EPS versus estimates

As the above chart shows, Centene’s diluted EPS in 4Q15 was $0.95 and managed to beat Wall Street analyst expectations by about $0.09. The company’s strong performance is mainly driven by the effective implementation of its geographical diversification strategy.

Centene currently offers 231 solutions through its Medicaid and long-term contracts in 23 states in the US. The company expects to enter the market of Nebraska in 2016, which will become the 24th state in Centene’s range of operations. The diversification strategy has enabled the company to have stable revenue and margin growth, as the losses faced in one state are offset by profits earned in other states.

Revenues and margins

In 4Q15, Centene earned about $6.3 billion in revenues, a rise of 33.4% on a YoY (year-over-year) basis. Its net profit margin, however, declined by 0.3% on a YoY basis and reached 1.9%. Cigna earned revenues of about $22.8 billion in 2015.

In 2015, peers such as UnitedHealth Group (UNH) and Anthem (ANTM) reported revenues of about $157 billion and $79.2 billion, respectively. UnitedHealth Group, Centene, and Anthem make up 2.0%, 2.2%, and 1.4%, respectively, of the First Trust Health Care AlphaDEX Fund (FXH).

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Subsequent stock price movement

After the release of its 4Q15 earnings results, Centene’s share price rose by about 3.3%, from $53.7 on February 8, 2016, to $55.5 on February 9, 2016. Centene is currently trading at lower price levels than its share price after its 3Q15 earnings results in October, and Centene has lost about 17.1% of its price on January 5, 2016, when the stock was at about $67. But US stocks have generally witnessed a slide since China stopped its stock trading on January 6, after Chinese stocks fell more than 7% in a half hour.

Centene witnessed a further slide in share price on January 25, 2016, when the company announced that it has lost six hard drives containing the personal information of about 950,000 members. Share prices are expected to recover, however, because the company has posted solid revenue numbers from 4Q15.

Now let’s discuss the key drivers of Centene’s revenue and margin performance in 2015.


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