Centene Corporation (CNC)

By both methods, the value today (DCF $140 · Multiples $104) exceeds the market price ($67).

Today — fairly valued: at $67 trades ~35.3% below its value discounted to today (~$104); the discount is positive but does not reach the margin of safety we require (≥38%).

At 5 years — Infravalorado: the target price ($129) plus dividends yield above the required average return (10%) — the business compounds.

The bridge: the return at 5 years exceeds the risk-free rate (4.5%) — but the discount does not reach the required margin of safety (≥38%). To require a 15% annual return, it would need to be bought at ~$64.

Educational / informational. Does not constitute investment advice.

The inverse approach: instead of projecting growth to obtain the value, the market price ($67) is taken as given and it solves for what annual owner-earnings growth would need to hold for 5 years for the present value —at the method's rate (4.5%, no-growth terminal)— to equal that price. It is the disconfirmation test: the expectations the price already pays for, contrasted against the method's projection.

The market discounts less growth (-8.1%/year) than we project (8.0%/year) → if the base case holds, there is margin: perception is more pessimistic than the estimated reality.

That growth implies ~$1.4 bn of owner earnings in year 5 (vs ~$3.2 bn of our base case). It recalculates if the DCF assumptions are edited.

Year-by-year projection of the selected scenario. From each year, two versions of the flow are derived: growth FCF (operating flow − total capex, the cash surplus) and maintenance FCF (the owner earnings: what the business yields if it only sustains its capacity). The flow is returned almost in full (dividend + buyback) or redeployed into the operation, so that EV stays roughly flat and multiples compress because the metric grows, not because of cash accumulation. The valuation is done on Utilidad ajustada (P/E normalizado). In edit mode, revenue, margins, capex, and exit multiples can be adjusted.

Year 0 = TTM to 30-Jun-2026 (US$178,655 million of revenue, XBRL). The year-0 margin is normalized (not the real TTM, which is negative) because the result of the last twelve months includes non-cash impairments of goodwill (US$6,723M, Q3'25), Magellan Health (US$513M) and intangibles (US$55M) for US$7,291 million in total: normalized adjusted TTM net income is approximately US$2,191 million (a 1.23% margin) instead of the reported loss of US$5,100 million. Year 1 starts from the guidance in the 8-K release of 28-Jul-2026 (Item 2.02): «premium and service» revenue of US$173.0-177.0 billion and a floor of US$4.80 of adjusted earnings per share for fiscal 2026 (with ~US$0.50/share of non-recurring items in Medicare and Commercial declared by the company), implying a slight revenue contraction in year 1 against the current TTM (which had been growing 13% year over year) because the guidance reflects the expected impact of the OBBBA Act (Jul-2025) on Marketplace and Medicaid membership in 2026. The path explicitly declares a trough-and-recovery pattern (R1 bis): it falls in year 1 and then accelerates toward a landing of ~5% in year 5, supported by the structural growth of Medicaid (~7%/year) and Medicare (~8%/year) that CMS projects and by the mandatory integration of dual eligibles (2027-2030). Segment revenue reported in the segment note (Medicaid+Medicare+Commercial+Other = US$194,777 million) does not reconcile dollar for dollar with consolidated XBRL revenue (US$174,581 million, an 11.6% discrepancy): the segment «total revenue» includes premium tax and pass-through items that the 2026 guidance itself separates as «total revenue» (US$193.5-197.5bn) from «premium and service revenue» (US$173.0-177.0bn); the segment weights are used as proportions for the growth breakdown, not as reconcilable dollars. ΔNWC (US$-2.963bn TTM) uses the FY2025 figure as a proxy (a cash release from growth in the medical claims liability, the float of the business), given that the Jul-25/Jun-26 TTM window is not disaggregated in the available sections; it is volatile year to year. Interest (US$0.678bn) uses the FY2025 expense as a proxy for the TTM. Normalized tax rate ~22.6% (the effective rate of FY2024, the last year without distortion from impairments; the real TTM rate is not representative because of the pre-tax loss combined with a positive tax expense). The model is treated at the equity level (post-interest): cajaStart and deuda at zero because the funding is already incorporated in earnings via interest expense, following the convention of the managed care archetype band. With no material buyback (US$35M TTM, well below the materiality threshold of ~1%/year of market capitalization) and no dividend: reinvestsExcess=true is flagged, with no sharesPath, given that the company prioritizes rebuilding regulatory capital and repayment/reinvestment over returning cash to shareholders after the year of impairments.

Today's elevated multiple is the price of growth: if the business grows, the entry point cheapens on its own going forward (the metric grows while EV stays roughly flat). The exit multiple at 3 years is higher than the terminal at 5 years —at 3 years there is more growth still ahead—, so the value curve shows whether value creation is concentrated in the early or the later years. The required return is applied to the base scenario.

They are valued separately, with their own rationale, and are not incorporated into the base or the verdict (they are excess return). When assigning them value — in Editmode —, the total with optionalities updates live, without moving the base.

The verdict, the base CAGR, and the margin of safety are always calculated on the base; optionalities do not alter them (with optionalities at $0 they do not move).

Each card fixes a required annual return and answers: if the business is worth $129 in 5 years, what is the maximum that can be paid today to obtain that return? Since it now trades at $67, the margin of safety is how much cheaper the market is than that maximum. The three thresholds: 4% covers inflation (the floor), 10% is the long-term average return, and 15% is the level of a great investment.

With a target price of $129 in 5 years and a required return of 4.5% annually, the maximum to pay today is $104. Against the current market price ($67), the margin of safety is 35.3% (trades below the maximum → there is margin) and the total return at that price would be 14.0% annually.

• Entry multiple. Trades at a moderate entry multiple on adjusted earnings guided for 2026.
• Recovery already priced in. Much of the recovery implied by guidance is already priced in.
• Elevated guidance. The company raised its 2026 revenue and adjusted earnings guidance in the July 2026 release.
• Expected return. Undervalued, with an estimated annual return of +14% at the market price.
• Margin of safety. It trades at a real discount to value, though short of the required margin of safety.
• Sensitivity to the terminal multiple. The 5-year value depends on sustaining an exit multiple within the band for regulated managed-care insurers.
• Sector comparables. Trades in line with lower relative-quality managed-care peers within the archetype's band, reflecting the recent moat erosion.

• ✓ ROIC exceeds the cost of capital (~10%)
• ✓ CFROIC backs up the ROIC (269%, cash vs. accruals)
• ✓ Healthy balance sheet (low corporate debt)
• ✓ Durable competitive moat (multiple advantages)

• Trailing-twelve-month earnings distorted. Trailing-twelve-month earnings include a non-cash goodwill impairment of $6,723 million recorded in the third quarter of 2025.
• Positive normalized earnings. Excluding the non-recurring 2025 impairments, trailing-twelve-month adjusted earnings return to positive territory.
• Margin sensitivity to the HBR. The health benefits ratio rose from 88.3% to 91.9% between 2024 and 2025, compressing the operating margin of an already thin-margin business.
• SG&A operating leverage. The SG&A expense ratio improved from 8.5% to 7.4% of revenue between 2024 and 2025 from spending discipline.
• Medical claims liability float. The medical claims liability acts as a source of self-generated funding (float) that grows with membership.
• Return on capital. Return on invested capital is depressed by the year of operational stress; it is measured against the 10% bar.
• Operating cash generation. Trailing-twelve-month operating cash flow stayed positive despite the accounting loss, supported by non-cash items.

Annual levels from the official filing (10-K); the % over each bar is the year-over-year (YoY) growth vs the prior year.

Centene monetizes through a per-member capitation premium (Medicaid/Medicare) or a Marketplace premium, with the HBR as the variable that determines margin. Unlike an e-commerce marketplace (GMV × take rate), here the driver is membership × per-member premium minus the medical cost consumed by that membership; the HBR summarizes that relationship in a single ratio.

The % are the annual (year-over-year) growth: each year —historical and projected— vs the prior one; the TTM (trailing 12m) vs the TTM of a year ago, to avoid overlapping windows. The historicals are exact figures from the official filings; the projected years come from the year-by-year model (the intermediate years without their own series are interpolated between the anchors). The projected columns (+1y…+5y) are 12-month windows counted from the TTM close (30-jun-2026): the projection starts from the most recently reported data, not the fiscal year. The projected base is realistic and unbiased — the risk discount is applied at the end, via the required return. The rationale for each metric is in the (i).

• Marketplace growth. Marketplace membership grew 26% year over year in 2025 on geographic expansion and strong open enrollment.
• Medicare PDP growth. PDP membership grew 17% year over year, with favorable bid positioning against the CMS benchmark.
• Medicaid contraction. Medicaid membership fell 3% year over year from the ongoing state eligibility redetermination process.
• Regulatory headwind (OBBBA). The July 2025 law cuts ACA subsidies and imposes Medicaid work requirements starting in 2027, pressuring 2026 membership.
• Dual-eligible opportunity. Mandatory Medicaid-Medicare integration required by CMS between 2027 and 2030, with Centene among those with the highest D-SNP concentration.
• ICHRA expansion. The employer individual-coverage reimbursement product expands from 6 to 13 states in 2026, still in an early stage.
• Structural growth in public health spending. CMS projects Medicaid spending growing near 7% annually and Medicare near 8% annually through 2031.

• Medicaid scale. The country's largest Medicaid insurer, 12.5 million members across 30 states.
• Marketplace scale. The largest ACA insurer, with 5.5 million members in 29 states under the Ambetter Health brand.
• Medicare PDP leadership. The largest standalone Part D provider, with 8.1 million members rising to 8.7 million in January 2026.
• Geographic concentration. Medicaid contracts in Florida and New York each individually represent 10% or more of Medicaid premiums.
• Reliance on government contracts. Nearly all revenue depends on Medicaid/Medicare/ACA programs subject to periodic re-bidding.
• Capital-light model. Prioritizes partnering with providers rather than owning them, reducing the business's capital intensity.
• Demand recurrence. Health coverage for underserved populations is a structural need, largely insensitive to the general economic cycle.

Not all debt is equal: only the structural needs refinancing; the rest is operational (self-liquidating).

Structural debt is what is exposed to the contraction phase of the cycle; operational debt (leases, matched funding) self-liquidates with the business.

• ✓Leverage (net debt / EBITDA)Net cash $0 bn
• !Interest coverage (EBIT / interest)4.0x
• –Liquidity (current ratio)no data
• ✓Cash quality (CFROIC vs ROIC)CFROIC backs 269% of ROIC
• ✓Value creation (ROIC − 10% bar)+8pp
• ✓Malinvestment test (capex vs incremental ROIC)Capex/D&A 0.6x — no over-investment
• ✓Float / working capitalFrees up cash $3 bn (float / negative WC)
• ✓Dilution (SBC % of revenue + shares)SBC 0.1% of revenue

A traffic-light interpreted by the method (not generic): float (negative WC) adds up, capex is judged by incremental ROIC (malinvestment test), and a lender is not subjected to corporate solvency. The (i) shows the derivation of each number.

• Cash position. Cash and short-term investments of $27,057 million against total debt of $16,105 million at the close of the second quarter of 2026.
• Moderate leverage. Total debt represents a manageable fraction of invested capital, with no significant near-term maturities concentrated ($75 million of current debt).
• Equity impacted by the impairment. Equity was reduced by the non-cash goodwill impairment recognized in 2025.
• Regulatory capital reserves. A large part of consolidated cash corresponds to statutory capital retained in the insurance subsidiaries, not freely distributable.
• No dividend. The company does not pay a dividend, preserving cash for regulatory capital and contingencies.
• Operating liquidity. Trailing-twelve-month operating cash flow stayed positive despite the period's accounting loss.

Who owns the shares — the alignment and whether there is a controlling shareholder.

• CEO with an internal track record. Sarah London has led the company since March 2022 after holding technology and operating roles within Centene since 2020.
• Low insider ownership. Directors and executives as a group own less than 1% of shares outstanding.
• Dominant passive institutional ownership. Vanguard and BlackRock together hold close to 20% of shares, typical of a widely held company with no controlling shareholder.
• Recognition of the impairment. The company transparently recognized the $6,723 million goodwill impairment in the same quarter the analysis was completed, without deferring it.
• Disciplined pause on buybacks. Share buybacks were drastically reduced in 2025-2026 to preserve capital after the stress year, prioritizing balance-sheet strength.

• Motivated sellers: 2025 brought a non-cash goodwill impairment and an HBR that spiked, sinking GAAP earnings while the underlying business still generates positive operating cash flow
• Partial missing buyers: regulatory uncertainty from the OBBBA on Medicaid/Marketplace keeps some investors cautious despite the elevated guidance
• Over-punished turnaround narrative: the company is protesting contract losses in Texas and Georgia, noise that does not necessarily reflect the value of the remaining portfolio

Part of this normalization story is already priced into the market.

The annual return (CAGR at 5 years) in each scenario, with the total period return below — the margin of safety made visual: upside range wide, downside range narrow.

Even in the bear scenario, the return holds at -5%/year (-25% total): the margin of safety protects the downside. The bull (+30%/year, +272% total) exceeds it comfortably — a favorable asymmetry, with a narrow downside range and a wide upside range.

• Mismatch between medical cost and premium. The HBR spiked in 2025 from higher morbidity in Marketplace and higher Medicaid costs; state rate adjustments arrive late or fall short.
• OBBBA regulatory changes. Requires work requirements and more frequent redeterminations in Medicaid starting in 2027 and cuts ACA subsidies starting in 2026, reducing expected membership.
• Loss of state contracts. Centene is protesting lost Medicaid re-bids in Texas and Georgia; there is no guarantee of future contract renewals.
• CMS rate risk. CMS applied a negative rate for Medicare Advantage 2026 and two contracts received termination notices for low Star ratings.
• Risk of further impairment. A $6,723 million goodwill impairment already materialized in 2025; future fair-value reviews could generate additional charges.
• Segment reporting complexity. The total revenue figure the company reports by segment does not reconcile directly with consolidated income-statement revenue, requiring segment weights to be normalized as proportions.

Each thinker's analytical framework applied to our data.

• Buffett / Graham Quality + margin of safety

  Fails the quality gate: narrow moat, eroding.

• Peter Lynch Growth at a reasonable price (GARP)

  A fast grower growing 8% at a PEG of 1.9 → reasonable for its growth.

• Joel Greenblatt Cheap and high-return (Magic Formula)

  Earnings yield 8% (EBIT/EV) + ROIC 18% → makes the Magic Formula.

• Howard Marks Perception vs reality + cycle

  The price discounts -8% vs our 8%: perception is more pessimistic than reality, with an identified source of the discount.

• Seth Klarman Capital protection (bear scenario)

  Bear-scenario floor -5%/yr, bull-scenario ceiling +30%/yr over 5y: reasonable asymmetry, without an ample cushion.

• Pat Dorsey Moat strength (Five Rules)

  A narrow moat, eroding; sources: efficient scale, switching costs, intangibles, network effects → fails the Five Rules.

• Aswath Damodaran Expectations implied by the price

  Justifying the price requires discounting -8%, within what we project (8%) — the story squares with the numbers.