Centene Corp: Zacks’ Bull of the Day Play

Centene Corp (CNCSnapshot Report) is officially on the $100 roll. Never heard of such a thing? Well until recently, I hadn’t either but social media users have noted that stocks that are just short of $100 per share, tend to roll up over the psychological level and then add on a few more percent. CNC is a Zacks Rank #1 (Strong Buy) but not because of the $100 roll, so let’s see why as the stock is the Bull of the Day today.

$100 Roll

 

Is this really a thing? The $100 roll might have been something that stocks have witnessed in the recent past, but CNC doesn’t really hit into the mold of a stock that is about to test that level and then run straight through it. Instead, CNC first reached $100 on November 18, but the stock failed to hold that level and closed in the $98 range. On November 26, the stock again touched this mythical level, but again slipped more than $1 from that intraday high.

The last couple of sessions have been a different story. The stock reached a new 52 week high of $101.83 on December 3 and the stock closed only a few pennies below that level. The next day, the stock stayed in triple digit territory. Whether or not the stock “rolls up” to $102, $103 or even $104 is probably better left to the social media pundits who invented the phrase.

Company Description

Centene Corporation provides multi-line healthcare programs and services via its 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 Specialty Services segment provides behavioral healthcare programs, healthcare services to individuals, in-home health services for high acuity populations and health insurance to individual customers and their families. Centene Corporation was founded in 1984 and is headquartered in St. Louis, Missouri.

Ferguson Connection

Amidst the recent turmoil in Ferguson MO, CNC announced that they would open a new call center the town that was the center of social unrest. CNC calls St. Louis home, so this move should increase loyalty in Missouri, but for those of us that follow the stock, it was a signal that management is just as in touch with the community as they are with Wall Street.

Earnings History

Speaking of how CNC communicates with Wall Street, we can see that they have done a great job in this category over the last couple of years. The company has beat the Zacks Consensus Estimate in each of the last eight quarters. That means they know how to guide Wall Street to a reachable, and even beatable level.

 

Earnings Estimates

Analysts must really have liked what they heard on the most recent earnings call. Prior to the earnings release the Zacks Consensus Estimate for 2014 was $3.82, but following the call the number jumped up to $4.43.

The 2015 Zacks Consensus Estimate moved higher as well, but not by nearly the same amount. Prior the release, the number stood at $4.68. After the report the number moved to $4.88 and since then analysts have tweaked their models a bit higher and the current Zacks Consensus Estimate for 2015 is $4.90.

Most Recent Quarter

Since there was such a big move in estimates, I thought we would go over the quarter that caused such a big jump in earnings estimates. The company reported EPS of $1.22 when the Zacks Consensus Estimate was calling for $0.95. The $0.27 beat translated into a positive earnings surprise of 28%, roughly equal to the prior quarters positive earnings surprise. Revenues increased to a record $4.3B, up from $4.0B in the prior quarter and $2.8B in the same period a year ago.

As a result of the solid quarter, the stock moved higher by 9.3% in the session following the report.

Valuation

Given the great growth numbers you might expect this stock to carry a stiff valuation. The fact is, the valuation for this stock is not obscene at all, and in fact is showing only a small premium to the industry average. The forward PE of 23x is only slightly more than the 19x industry average. The price to book multiple sports the largest premium of the metrics commonly looked at by investors, but at 3.6x it is really not that much higher than the 2.3x industry average. Finally, the price to sales multiple of 0.4x is actually below the 0.5x industry average, which suggests that the stock trades at a very small discount to the industry average.

Chart

Zacks has developed a chart that helps investors see how earnings estimates have impacted the price of the stock over the last several years. We call this chart the price and consensus chart, and each color coded lines represents analyst estimates over a designated year. As estimates increase, the stock tends to follow. The Zacks Rank is impacted by earnings estimate increases, beats and incorporates the idea of analyst agreement and magnitude. As a Zacks Rank #1 (Strong Buy) we see that estimates are moving higher and higher, and that has helped push the stock higher as well. Sometimes investors tout a self-fulfilling prophecy like the $100 roll. Other times, investors will take a long term approach and buy a stock with a good history or communicating with its community and Wall Street and is exhibiting good growth. Either way, this stock is probably destined to continue to roll.

Follow Brian Bolan on twitter at @BBolan1

Brian Bolan is a Stock Strategist for Zacks.com. He is the Editor in charge of the Zacks Home Run Investor service, a Buy and Hold service where he recommends the stocks in the portfolio.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s