By Contributor Thomas Fuller Trefis Team
CANADA – 2025/04/06: In this photo illustration, the Centene Corporation logo is seen displayed on a … More smartphone screen. (Photo Illustration by Thomas Fuller/SOPA Images/LightRocket via Getty Images)
SOPA Images/LightRocket via Getty Images
Centene Corporation (NYSE:CNC) experienced a challenging Tuesday evening, witnessing a 25% drop in shares during after-hours trading on July 1st. The significant decline in the healthcare giant’s stock wasn’t merely another example of market fluctuations; it was directly sparked by the company’s complete withdrawal of its 2025 guidance, creating turmoil among investors.
The core of Centene’s issues can be traced back to disappointing data from the health insurance marketplaces. After reviewing data from 22 out of 29 marketplace states, the company found that enrollment figures were below expectations, and even more concerning, the individuals who did enroll were generally less healthy than anticipated.
This may seem like a minor issue, but it carries substantial financial repercussions. When insurers find themselves with a sicker patient demographic, they encounter increased medical expenses. To mitigate this risk, a federal initiative exists to help balance the landscape among various insurance firms. Nonetheless, as Centene’s marketplace demographic turned out to be different from what was projected, the company now estimates it will receive less funding from this federal risk-adjustment program.
The financial blow? An enormous $1.8 billion deficit that will reduce earnings by $2.75 per share. This represents a considerable setback considering that Centene previously projected adjusted earnings of over $7.25 per share for 2025 during their first quarter announcement.
And here’s the catch – this analysis only takes into account 22 states. The company still has data from an additional seven marketplace states to analyze, suggesting that further reductions in earnings could be on the way.
MORE FOR YOU
It’s not only Centene facing this dilemma. The entire health insurance sector has been grappling with comparable challenges. Medical costs have been rising steadily since the pandemic, characterized by an increase in the number of procedures and higher drug prices being a specific concern. CVS faced similar challenges last year, and UnitedHealth actually retracted its guidance earlier this year. See – Is UNH Stock Now A Falling Knife? Additionally, if you are seeking potential upside accompanied by a smoother experience than individual stocks, consider the High Quality portfolio, which has outperformed the S&P and achieved >91% returns since inception. Separately, check out – SOFI Stock To $30?
What This Means for CNC Stock
So, where does this position Centene’s stock price? Currently trading around $43 in after-hours markets, CNC is now valued at less than 6 times its trailing adjusted earnings of $7.74 per share. This marks a substantial decline from the stock’s three-year average P/E ratio of just above 11 times earnings.
However, this is where things become complex. When we account for the $2.75 earnings reduction from the previously projected $7.25, we anticipate 2025 earnings per share of approximately $4.50 – and this figure could potentially decline further as additional state data becomes accessible.
At the current price of $43 per share, even utilizing the adjusted $4.50 earnings estimate leads to a valuation multiple of nearly 10 times, which is considerably closer to the stock’s historical average. This indicates that while the 25% drop appears significant, it may actually represent a reasonable market reaction to the revised fundamentals.
The 25% decline in Centene’s stock seems warranted given the substantial earnings adjustment and ongoing ambiguity. With more state data still forthcoming and the threat of additional earnings downgrades, further stock weakness would not be unexpected.
Of course, our evaluation could be incorrect, and some investors might feel inclined to invest at these seemingly low levels – they could be correct if they are betting on a swift rebound. However, with earnings estimates still unstable and industry-wide challenges showing no signs of abating, it might be wise to wait for more clarity on Centene’s actual earnings potential for 2025. Now, we employ a risk assessment framework while building the Trefis High Quality (HQ) Portfolio which, with a selection of 30 stocks, has a history of comfortably outperforming the S&P 500 over the last four years. Why is this the case? As a collective, HQ Portfolio stocks provide greater returns with lower risk compared to the benchmark index; offering a less erratic experience, as demonstrated in HQ Portfolio performance metrics.
Editorial StandardsReprints & Permissions