BUY HOLD SELL A+ A A- B+ B B- C+ C C- D+ D D- E+ E E- F BUY July 17, 2016 BUY RATING SINCE 04/25/2013 TARGET PRICE $83.22 BUSINESS DESCRIPTION Centene Corporation operates as a diversified and multi-national healthcare enterprise that provides programs and services to under-insured and uninsured individuals in the United States. It operates through two segments, Managed Care and Specialty Services. STOCK PERFORMANCE (%) 3 Mo. 1 Yr. 3 Yr (Ann) Price Change 21.68-2.51 38.35 GROWTH (%) Last Qtr 12 Mo. 3 Yr CAGR Revenues 35.50 34.83 37.38 Net Income -126.98-8.65 577.83 EPS -125.00-8.36 433.68 RETURN ON EQUITY (%) Ind Avg S&P 500 Q1 2016 5.21 16.34 11.83 Q1 2015 16.23 13.71 13.71 Q1 2014 12.20 14.04 14.43 Sector: Health Care Sub-Industry: Managed Health Care Source: S&P Weekly Price: (US$) SMA (50) SMA (100) 1 Year 2 Years Rating History BUY Volume in Millions 2014 2015 2016 COMPUSTAT for Price and Volume, TheStreet Ratings, Inc. for Rating History TARGET PRICE $83.22 90 80 70 60 50 40 30 60 40 20 0 P/E COMPARISON RECOMMENDATION We rate () a BUY. This is driven by a few notable strengths, which we believe should have a greater impact than any nesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its robust revenue growth, good cash flow from operations and largely solid financial position with reasonable debt levels by most measures. We feel its strengths outweigh the fact that the company has had lackluster performance in the stock itself. 32.02 21.88 Ind Avg 25.03 S&P 500 HIGHLIGHTS The revenue growth came in higher than the industry average of 8.5%. Since the same quarter one year prior, revenues rose by 35.5%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share. EPS ALYSIS¹ ($) Net operating cash flow has significantly increased by 333.33% to $195.00 million when compared to the same quarter last year. In addition, has also vastly surpassed the industry average cash flow growth rate of 19.82%. Q1 0.29 Q2 0.40 Q3 0.67 Q4 0.87 Q1 0.52 Q2 0.72 Q3 0.75 Q4 0.91 Q1-0.13 The debt-to-equity ratio is somewhat low, currently at 0.81, and is less than that of the industry average, implying that there has been a relatively successful effort in the management of debt levels. Although the company had a debt-to-equity ratio, its quick ratio of 0.79 is somewhat and could be cause for future problems. 2014 2015 = not available NM = not meaningful 2016 1 Compustat fiscal year convention is used for all fundamental data items. has experienced a steep decline in earnings per share in the most recent quarter in comparison to its performance from the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, increased its bottom line by earning $2.90 versus $2.22 in the prior year. This year, the market expects an improvement in earnings ($4.20 versus $2.90). The gross profit margin for is currently extremely low, coming in at 11.18%. Regardless of 's low profit margin, it has managed to increase from the same period last year. Despite the mixed results of the gross profit margin, the net profit margin of -0.24% trails the industry average. PAGE 1
PEER GROUP ALYSIS REVENUE GROWTH AND EBITDA MARGIN* Revenue Growth (TTM) 0% 45% MOH GTS UNFAVORABLE HUM ANTM ANTXCI WCG AET 0% MGLN EBITDA Margin (TTM) FAVORABLE HQY 40% Companies with higher EBITDA margins and revenue growth rates are outperforming companies with lower EBITDA margins and revenue growth rates. Companies for this scatter plot have a market capitalization between $625.4 Million and $41.8 Billion. Companies with or NM values do not appear. *EBITDA Earnings Before Interest, Taxes, Depreciation and Amortization. REVENUE GROWTH AND EARNINGS YIELD Revenue Growth (TTM) HQY 0% 45% UNFAVORABLE HUM WCG 0% MGLN MOH GTS CI ANTM AET Earnings Yield (TTM) FAVORABLE ANTX 20% Companies that exhibit both a high earnings yield and high revenue growth are generally more attractive than companies with low revenue growth and low earnings yield. Companies for this scatter plot have revenue growth rates between 2.9% and 44.6%. Companies with or NM values do not appear. INDUSTRY ALYSIS The healthcare providers and services industry includes establishments offering healthcare facilities and managed care services such as hospitals, long-term care centers, assisted living facilities, outpatient rehabilitation clinics, outpatient dialysis centers, radiation oncology facilities and ambulatory surgical suites. The industry has witnessed continued growth during recent years. An aging population, increasing consumer awareness and advancement in technology will remain primary growth drivers in the near future. Healthcare spending in the US exceeds $2 trillion per year. A major shift in healthcare spending - from the private to the public sector - is expected as more and more baby boomers enter the Medicare system. In addition to demographic factors, the passage of comprehensive healthcare reform legislation including an individual mandate to have health insurance will reshape the industry in the coming decade. The largest two segments of publically funded healthcare are Medicaid and Medicare. Medicaid is a means-tested program for the poor funded at the federal level and state level. Medicare is a single-payer healthcare program entirely funded at the federal level and focuses on the older population of people age 65 and older. Small businesses, which have struggled to provide adequate health insurance to employees, will receive tax benefits to offer health insurance to their employees. Most large companies offer benefits to compete in the labor market, even though the associated outflow has a significant impact on the bottom line. Collection challenges contribute to rising expenses for providers. Administrative expenses, which include billing, collection and payment processes account for up to 30% of all expenditures. Cost-saving initiatives by payers, providers and employers have helped keep expenses under check, but have been generally insufficient to bring about any systemic optimization. The introduction of consumer-driven healthcare (CDHC) is a significant step toward disrupting this cost cycle. CDHC increases consumer awareness regarding cost and quality of healthcare while providing greater control over personal health management. Looking forward, more brand-name drugs will continue to become available as generics over the next few years. This could help healthcare providers realize savings in their pharmacy costs. The individual mandate for healthcare insurance creates a solid base of customers for the healthcare providers and services industry. This may build in a steady growth rate for the healthcare providers and services industry in the intermediate future. PEER GROUP: Health Care Providers & Services Recent Market Price/ Net Sales Net Income Ticker Company Name Price ($) Cap ($M) Earnings TTM ($M) TTM ($M) 72.05 12,283 32.02 24,582.00 275.00 GTS TRIPLE-S MAGEMENT CORP 26.28 625 16.43 3,077.73 40.74 WCG WELLCARE HEALTH PLANS INC 108.30 4,792 34.82 13,960.80 138.20 AET AET INC 119.15 41,774 17.94 60,826.20 2,339.30 ANTM ANTHEM INC 133.91 36,019 15.10 80,393.50 2,397.80 ANTX ANTHEM INC 44.83 36,019 5.05 80,393.50 2,397.80 CI CIG CORP 130.01 33,349 16.25 38,293.00 2,080.00 MOH MOLI HEALTHCARE INC 52.00 2,942 21.31 15,349.88 138.85 HUM HUMA INC 161.27 24,035 22.49 54,256.00 1,080.00 HQY HEALTHEQUITY INC 30.19 1,754 88.79 140.95 19.71 MGLN MAGELLAN HEALTH INC 69.03 1,709 45.41 4,733.45 37.36 The peer group comparison is based on Major Managed Health Care companies of comparable size. PAGE 2
COMPANY DESCRIPTION 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's 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. Centene Plaza, 7700 Forsyth Boulevard St. Louis, MO 63105 USA Phone: 314-725-4477 http://www.centene.com STOCK-AT-A-GLANCE Below is a summary of the major fundamental and technical factors we consider when determining our overall recommendation of shares. It is provided in order to give you a deeper understanding of our rating methodology as well as to paint a more complete picture of a stock's strengths and nesses. It is important to note, however, that these factors only tell part of the story. To gain an even more comprehensive understanding of our stance on the stock, these factors must be assessed in combination with the stock s valuation. Please refer to our Valuation section on page 5 for further information. FACTOR SCORE Growth 4.5 out of 5 stars Measures the growth of both the company's income statement and cash flow. On this factor, has a growth score better than 80% of the stocks we rate. Total Return 4.0 out of 5 stars Measures the historical price movement of the stock. The stock performance of this company has beaten 70% of the companies we cover. Efficiency 3.0 out of 5 stars Measures the strength and historic growth of a company's return on invested capital. The company has generated more income per dollar of capital than 50% of the companies we review. Price volatility 4.5 out of 5 stars Measures the volatility of the company's stock price historically. The stock is less volatile than 80% of the stocks we monitor. Solvency 4.5 out of 5 stars Measures the solvency of the company based on several ratios. The company is more solvent than 80% of the companies we analyze. Income 0.5 out of 5 stars Measures dividend yield and payouts to shareholders. This company pays no dividends. THESTREET RATINGS RESEARCH METHODOLOGY TheStreet Ratings' stock model projects a stock's total return potential over a 12-month period including both price appreciation and dividends. Our Buy, Hold or Sell ratings designate how we expect these stocks to perform against a general benchmark of the equities market and interest rates. While our model is quantitative, it utilizes both subjective and objective elements. For instance, subjective elements include expected equities market returns, future interest rates, implied industry outlook and forecasted company earnings. Objective elements include volatility of past operating revenues, financial strength, and company cash flows. Our model gauges the relationship between risk and reward in several ways, including: the pricing drawdown as compared to potential profit volatility, i.e.how much one is willing to risk in order to earn profits; the level of acceptable volatility for highly performing stocks; the current valuation as compared to projected earnings growth; and the financial strength of the underlying company as compared to its stock's valuation as compared to projected earnings growth; and the financial strength of the underlying company as compared to its stock's performance. These and many more derived observations are then combined, ranked, weighted, and scenario-tested to create a more complete analysis. The result is a systematic and disciplined method of selecting stocks. PAGE 3
Consensus EPS Estimates² ($) IBES consensus estimates are provided by Thomson Financial FINCIAL ALYSIS 's gross profit margin for the first quarter of its fiscal year 2016 is essentially unchanged when compared to the same period a year ago. Even though sales increased, the net income has decreased. has liquidity. Currently, the Quick Ratio is 0.79 which shows a lack of ability to cover short-term cash needs. The company's liquidity has decreased from the same period last year. 1.08 Q2 FY16 4.20 E 2016(E) 4.98 E 2017(E) At the same time, stockholders' equity ("net worth") has greatly increased by 188.35% from the same quarter last year. Overall, the key liquidity measurements indicate that the company is in a position in which financial difficulties could develop in the future. STOCKS TO BUY: TheStreet Quant Ratings has identified a handful of stocks that can potentially TRIPLE in the next 12-months. To learn more visit www.thestreetratings.com. INCOME STATEMENT Net Sales ($mil) 6,953.00 5,131.00 EBITDA ($mil) 244.00 146.00 EBIT ($mil) 209.00 119.00 Net Income ($mil) -17.00 63.00 BALANCE SHEET Cash & Equiv. ($mil) 3,705.00 1,817.00 Total Assets ($mil) 18,652.00 6,696.00 Total Debt ($mil) 4,280.00 1,128.00 Equity ($mil) 5,297.00 1,837.00 PROFITABILITY Gross Profit Margin 11.18% 10.76% EBITDA Margin 3.50% 2.84% Operating Margin 3.01% 2.32% Sales Turnover 1.32 2.72 Return on Assets 1.47% 4.49% Return on Equity 5.21% 16.23% DEBT Current Ratio 0.96 1.07 Debt/Capital 0.45 0.38 Interest Expense 33.00 10.00 Interest Coverage 6.33 11.90 SHARE DATA Shares outstanding (mil) 170 119 Div / share 0.00 0.00 EPS -0.13 0.52 Book value / share 31.08 15.45 Institutional Own % Avg Daily Volume 1,997,494 2,980,786 2 Sum of quarterly figures may not match annual estimates due to use of median consensus estimates. PAGE 4
RATINGS HISTORY Our rating for has not changed since 4/25/2013. As of 7/14/2016, the stock was trading at a price of which is 4.8% below its 52-week high of $75.69 and 52.1% above its 52-week low of $47.36. VALUATION BUY. The current P/E ratio indicates a significant premium compared to an average of 21.88 for the Health Care Providers & Services industry and a premium compared to the S&P 500 average of 25.03. For additional comparison, its price-to-book ratio of 2.32 indicates a discount versus the S&P 500 average of 2.80 and a discount versus the industry average of 3.35. The current price-to-sales ratio is well below the S&P 500 average and is also below the industry average, indicating a discount. 2 Year Chart BUY: $38.55 2014 2015 $100 $75 $50 MOST RECENT RATINGS CHANGES Date Price Action From To 7/14/14 $38.55 No Change Buy Buy Price reflects the closing price as of the date listed, if available RATINGS DEFINITIONS & DISTRIBUTION OF THESTREET RATINGS (as of 7/14/2016) 38.50% Buy - We believe that this stock has the opportunity to appreciate and produce a total return of more than 10% over the next 12 months. 31.67% Hold - We do not believe this stock offers conclusive evidence to warrant the purchase or sale of shares at this time and that its likelihood of positive total return is roughly in balance with the risk of loss. 29.84% Sell - We believe that this stock is likely to decline by more than 10% over the next 12 months, with the risk involved too great to compensate for any possible returns. Price/Earnings 32.02 Peers 21.88 Premium. A higher P/E ratio than its peers can signify a more expensive stock or higher growth expectations. is trading at a significant premium to its peers. Price/Projected Earnings 14.47 Peers 16.29 Average. An average price-to-projected earnings ratio can signify an industry neutral stock price and average future growth expectations. is trading at a valuation on par with its peers. Price/Book 2.32 Peers 3.35 Discount. A lower price-to-book ratio makes a stock more attractive to investors seeking stocks with lower market values per dollar of equity on the balance sheet. is trading at a significant discount to its peers. Price/Sales 0.50 Peers 0.81 Discount. In the absence of P/E and P/B multiples, the price-to-sales ratio can display the value investors are placing on each dollar of sales. is trading at a significant discount to its industry on this measurement. Price/CashFlow 11.56 Peers 12.26 Average. The P/CF ratio, a stock s price divided by the company's cash flow from operations, is useful for comparing companies with different capital requirements or financing structures. is trading at a valuation on par to its peers. Price to Earnings/Growth 0.71 Peers 0.93 Discount. The PEG ratio is the stock s P/E divided by the consensus estimate of long-term earnings growth. Faster growth can justify higher price multiples. trades at a discount to its peers. Earnings Growth lower higher -8.36 Peers 22.39 Lower. Elevated earnings growth rates can lead to capital appreciation and justify higher price-to-earnings ratios. However, is expected to significantly trail its peers on the basis of its earnings growth rate. Sales Growth lower higher 34.83 Peers 13.54 Higher. A sales growth rate that exceeds the industry implies that a company is gaining market share. has a sales growth rate that significantly exceeds its peers. TheStreet Ratings 14 Wall Street, 15th Floor New York, NY 10005 www.thestreet.com Research Contact: 212-321-5381 Sales Contact: 866-321-8726 DISCLAIMER: The opinions and information contained herein have been obtained or derived from sources believed to be reliable, but TheStreet Ratings cannot guarantee its accuracy and completeness, and that of the opinions based thereon. Data is provided via the COMPUSTAT Xpressfeed product from Standard &Poor's, a division of The McGraw-Hill Companies, Inc., as well as other third-party data providers. TheStreet Ratings is a division of TheStreet, Inc., which is a publisher. This research report contains opinions and is provided for informational purposes only. You should not rely solely upon the research herein for purposes of transacting securities or other investments, and you are encouraged to conduct your own research and due diligence, and to seek the advice of a qualified securities professional, before you make any investment. None of the information contained in this report constitutes, or is intended to constitute a recommendation by TheStreet Ratings of any particular security or trading strategy or a determination by TheStreet Ratings that any security or trading strategy is suitable for any specific person. To the extent any of the information contained herein may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person. Your use of this report is governed by TheStreet, Inc.'s Terms of Use found at http://www.thestreet.com/static/about/terms-of-use.html. PAGE 5