- The death of Michael Neidorff was the end of an era at Centene (CNC) stock
- Activists are pushing for change, which may include the company’s sale
- The Spirit Airlines (SAVE) of health care
The death of long-time Centene (NYSE:CNC) CEO Michael Neidorff was the end of an era in managed care, and for Centene stock.
Neidorff spent 25 years building Centene to #24 on the Fortune 500, mainly by profiting off Medicaid contracts. Its offerings became popular on the Obamacare exchanges because of their low price. Its system of buying clinics to hold down the cost of care was proven effective.
But Neidorff was also controversial. His decision to retire in December came amid a board shakeup aimed at increasing returns. There have been reports of both Cigna (NYSE:CI) and Humana (NYSE:HUM) eying a takeover. Its international operations may be on the block.
The result is that investors who profited from Centene’s rise now face a period of uncertainty.
Centene was selling April 11 at a little over $88/share. That’s a market capitalization of $51.5 billion on 2021 revenue of $126 billion. Shares were selling for almost 30 times last year’s $2.28/share of earnings but just 12 times last year’s $4.2 billion in operating cash flow.
About 26.6 million people now get care from Centene, including both my adult children. Both frequently complain about Centene’s limited network. But young, healthy people aren’t Centene’s primary target. That would be people with chronic conditions, like high cholesterol or diabetes, who represent 75% of America’s health care bill. By owning its own clinics, and seeing these patients regularly, Centene can keep its patients out of the hospital, which is where costs can pile up.
The model is so effective that Centene has been winning many Medicaid contracts where reimbursements are tight, and competitors are few. Profits on those contracts are the secret of its success.
Last year Centene covered over 15 million Medicaid patients, against just 2.6 million commercial customers. It had about 2.14 million covered under the Obamacare Health Insurance marketplace. Medicaid expansion helped that part of the business to 13% growth.
Where To Now?
Sarah London, 41, was named Centene CEO last month. Before joining Centene she was with United Healthcare (NYSE:UNH), which has been the best-performing health insurer over the last five years.
Activist investor Quentin Koffey bought a $900 million stake in CNC Stock last November. Formerly at D.E. Shaw, he bought through a new operation called Politan. Koffey demanded a new slate of directors, including veteran health insurance executives, and expanded margins. Since then, Centene stock is up 19%.
London has a full plate of controversies to deal with. Centene has had to settle lawsuits against its Pharmacy Benefit Manager. Customers have also sued over access to doctors, an issue my own family has faced. The company has also faced charges of bid-rigging on its Medicaid contracts.
The Bottom Line
Neidorff built Centene through tight cost controls on Medicaid that let government expand the program.
After a period of fierce resistance all but 12 states now offer the expanded Medicaid coverage created by the Affordable Care Act. Texas and Florida, however, continue to resist, meaning there is room for growth.
While Centene under Neidorff offered competitive pricing, its expansion beyond Medicaid has been hampered by a lack of services. I call it the Spirit Airlines (NYSE:SAVE) of healthcare, because its prices are low but its reputation is poor.
Still, Spirit’s stock is up 17% this year, as both Frontier Group (NASDAQ:ULCC) and JetBlue (NASDAQ:JBLU) have made bids for the budget carrier.
This could be where Centene is headed if London can’t find a quick fix for its other problems as much of the stock’s recent rise is based on speculation of a takeover. If you get in now, that’s what you’re betting on, too.
On the date of publication, Dana Blankenhorn held no positions in companies mentioned in this story. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.