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Centene (CNC) Receives DMHC Approval for Magellan Acquisition

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Centene Corporation’s CNC acquisition deal with Magellan Health, Inc. MGLN recently received a green signal from the medical watchdogs in California. The California Department of Managed Health Care (“DMHC”) approved the deal with some conditions.

Magellan Health, being the parent body for two licensed health plans by DMHC, namely Human Affairs International of California (HAI-CA) and Magellan Health Services of California, Inc. - Employer Services (MHSC), required regulatory approval for vending the health plans. The conditions from DMHC are aimed at protecting consumers and keeping the state’s healthcare delivery system stable. The regulatory authority expects them to control healthcare costs.

Following the closing of the $2.2-billion deal, Magellan Health’s HAI-CA contracts will continue without changing the rates for a minimum of two years. Centene’s acquisition of Magellan Health will not result in the addition of acquisition expenses to the premiums. Also, any increase in the premium rate is expected to be at a minimum level, keeping healthcare costs affordable.

A third-party monitoring authority will help Centene and Magellan Health to keep their plans separate and ensure compliance with the laid-out conditions. The plans are expected to provide $10 million to integrate behavioral health into primary care practices in the health care delivery system of the state.

Centene’s mergers and acquisitions strategy is mainly targeted at expanding the company’s markets and increasing its Medicaid membership. The Magellan Health deal is expected to close on Jan 4, 2022, around a year after the buyout announcement. The combination of both the companies is expected to allow the merger of behavioral health, specialty healthcare and pharmacy management, which is likely to create better healthcare services. It will allow Centene to establish one of the nation’s biggest behavioral health platforms across 41 million members with better care facilities.

CNC recently provided an upbeat 2022 outlook incorporating the Magellan Health acquisition. Centene expects total revenues for 2022 in the range of $135.9-$137.9 billion, including $4.4 billion from the acquisition. Adjusted earnings per share are expected within $5.30-$5.50 for 2022. The bottom line is expected to be supported by lower expenses and gross margin improvement. The adjusted SG&A expense ratio for 2021 is expected within 8.2-8.6% and decline to 7.8-8.3% in 2022.

As the overall economy is recovering fast and the unemployment rate is falling, the number of coverages being bought by employers for their workers is rising and is expected to keep doing so. Apart from CNC, other companies including UnitedHealth Group Incorporated UNH and Anthem, Inc. ANTM have also provided upbeat guidance.

UnitedHealth expects 2021 adjusted earnings per share to be $18.75-$18.90, indicating an increase from the 2020 level of $16.88. The figure is likely to further rise to $21.10-$21.60 per share in 2022. The overall increase in the bottom line will likely be supported by lower operating costs. UnitedHealth expects the operating cost ratio to be 14.8% in 2021, suggesting a decline from the last year’s 16.2%. The metric might marginally decrease to 14.5% in 2022. UNH is focused on increasing the value for shareholders, backed by rising cash flows. Operating cash flows for 2021 are expected to be $23 billion, implying a marginal increase from the 2020 level of $22.2 billion. For 2022, UnitedHealth expects operating cash flows within $23-$24 billion.

Anthem’s top-line improvement remains impressive, with a four-year CAGR of 9% (2015-2020). We expect the favorable top-line trend to continue, given its strong business growth, membership hike and significant new contracts in the government business. ANTM expects adjusted net income for the current year to be more than $25.85 per share, higher than the previous estimate of $25.50. It has witnessed three upward estimate revisions in the past 60 days and one downward movement. Anthem beat earnings estimates thrice in the last four quarters and missed once, with the average surprise being 4.7%.

Price Performance and Zacks Rank

Centene’s shares have increased 39.9% in the past year compared with the industry’s 40.1% rise.

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The company currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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UnitedHealth Group Incorporated (UNH) : Free Stock Analysis Report

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