DCF Studio

    CNC · NYQ · Healthcare

    Centene Corporation

    Also onShortfallConsensus DriftCrosscheck

    Implied value per share

    USD 119.74

    Market price

    USD 65.11

    Implied upside

    +83.9%

    5-year forecast · Perpetuity growth terminal value · Mid-year discounting · Base case

    AdjustedReported capital expenditure averages just 0.50% of revenue, which is too low to be the company's real investment - property trusts and similar structures invest through lines that are not reported as capex. Capex has been set to 1.00% of revenue so the forecast is not handed free growth. The accounts do not separate depreciation from amortisation, so the combined charge is used - if a large part of it is amortisation of an acquisition, the reported capex is probably right and this substitution is not. Override it if the reported figure is right.

    Current EV/EBITDA of 31.2x sits outside a defensible 3-20x band, so the exit multiple is capped at 20.0x. A multiple that far out usually means EBITDA is the wrong denominator for this business.

    Value Per Share

    Perpetuity growth
    USD 119.74+83.9%
    Exit multiple
    USD 269.69+314.2%
    Market price
    USD 65.11

    Same forecast, different terminal treatment. Percentages vs price.

    Forecast Cashflows

    Reporting currency (USD). Outflows negative.

    0bn3bn6bnFY26FY27FY28FY29FY30
    Nominal FCFFDiscounted to todayUSD
    LineFY26FY27FY28FY29FY30CAGR
    RevenueUSD 215.1bnUSD 237.6bnUSD 262.5bnUSD 289.9bnUSD 320.2bn+10.5%
    EBITUSD 3.5bnUSD 3.9bnUSD 4.3bnUSD 4.8bnUSD 5.2bn+10.5%
    NOPATUSD 2.8bnUSD 3.1bnUSD 3.4bnUSD 3.8bnUSD 4.1bn+10.5%
    Add depreciation & amortisationUSD 1.7bnUSD 1.9bnUSD 2.1bnUSD 2.4bnUSD 2.6bn+10.5%
    Less capital expenditureUSD -2.2bnUSD -2.4bnUSD -2.6bnUSD -2.9bnUSD -3.2bn+10.5%
    Less increase in working capitalUSD 2.0bnUSD 2.2bnUSD 2.4bnUSD 2.6bnUSD 2.9bn-10.5%
    Free cashflow to firmUSD 4.3bnUSD 4.8bnUSD 5.3bnUSD 5.8bnUSD 6.4bn+10.5%
    Discount factor0.96050.88620.81770.75440.6961-
    Present valueUSD 4.2bnUSD 4.2bnUSD 4.3bnUSD 4.4bnUSD 4.5bn+1.9%
    Present Value Of The ForecastUSD 21.6bn

    Discount Rate

    Source shown per component. All overridable above.

    Risk-free rate5.00%US 10-year Treasury (^TNX)
    Equity risk premium5.50%Market assumption
    Beta1.071Reported 1.106, pulled toward 1.0 (Blume)
    Cost of equity10.89%Risk-free + beta x equity risk premium
    Cost of debt5.00%Floored at the risk-free rate (implied cost of debt was lower)
    Market capitalisationUSD 32.2bn63.9% of capital
    Total debtUSD 18.2bn36.1% of capital, book value as a proxy
    Tax rate21.0%Effective, capped at statutory
    WACC8.38%E/V x Re + D/V x Rd x (1 - t)

    Terminal Value

    Perpetuity growth is intrinsic. The exit multiple defaults to the company's current EV/EBITDA, so it answers a different question - what the shares are worth if today's rating holds and EBITDA grows as forecast.

    Perpetuity growth at 2.50%

    Value per shareUSD 119.74

    62% of EV

    Forecast FCFF, final year
    USD 6.4bn
    Capex at depreciation, working capital in reinvestment
    USD 4.1bn
    Less reinvestment at g/ROIC (29.8% of NOPAT)
    USD -1.2bn
    Capitalised
    USD 2.9bn
    ROIC (WACC floor)
    8.4%
    Terminal value, undiscounted
    USD 50.7bn
    Terminal value, discounted
    USD 35.3bn
    Enterprise value
    USD 56.9bn
    Less net debt
    USD -2.2bn
    Equity value
    USD 59.0bn

    Exit at 20.0x EBITDA

    Value per shareUSD 269.69

    83% of EV

    Terminal value, undiscounted
    USD 156.9bn
    Terminal value, discounted
    USD 109.2bn
    Enterprise value
    USD 130.8bn
    Less net debt
    USD -2.2bn
    Equity value
    USD 133.0bn

    Spread between methods: 77%.

    Sensitivity

    Value per share (USD) by discount rate and long-run growth.

    Long-run growth
    Discount rate1.50%2.00%2.50%3.00%3.50%
    6.38%151.52152.01152.51153.01153.51
    7.38%133.12133.53133.94134.36134.77
    8.38%119.05119.40119.74120.09120.44
    9.38%107.93108.23108.53108.82109.12
    10.38%98.9199.1799.4399.6999.95

    Outlined: this model. Green text: above today's price of 65.11. Shading: distance from this model's own value.

    Priced In

    What each input would have to be to justify the current price, one at a time.

    InputModelImpliedGap
    Revenue growth, every year10.5%-0.2%-10.6pp
    EBIT margin1.6%0.7%-0.9pp
    Discount rate8.4%17.2%+8.8pp
    Download as Excel

    Live formulas, not pasted numbers - edit a driver and the workbook reprices.

    Yahoo Finance and RBA data. General information, not advice. Methodology.