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United States : Centene Controls Costs in 2Q.

We are maintaining our fair value estimate for Centene CNC following the release of second-quarter results. The company is on target to slightly exceed our earnings expectations for 2010.

Centene's second-quarter revenue increased 12.8% primarily as a result of higher membership. High unemployment continues to push people into Medicaid, and Centene's total membership grew 3.4% sequentially and 12.8% from the prior year.

Pricing has been a concern, as many states are contending with economy-driven budget shortfalls and Medicaid is one of their biggest expenses. Although Centene's management stated that it expects average premiums to increase 1%-3% in 2010, this likely won't be enough to keep up with rising medical costs. The medical cost ratio (medical costs as a percentage of premium revenue) deteriorated to 83.8% from 83.1% in the quarter.

Cash flow has also been weak as a result of states delaying payments to contractors like Centene. Through the first six months, Centene reported about $50 million in net income, but cash from operations was a $100 million outflow.

While this necessitates some near-term balance sheet management--and may have been one of the reasons Centene chose to issue $100 million worth of new stock in the first quarter--cash flow should approximate net income over the long run.

The biggest positive we see in the quarter is Centene's administrative expense, which fell to 12.7% of operating revenue from 13.9%. On an absolute dollar basis, administrative expense increased 3% from the prior year and was down slightly from the first quarter. While Centene still has work to do to bring costs in line with competitors, we view this as a positive sign, since we expect low administrative costs to be key to success in Medicaid going forward.

Copyright : Euclid Infotech Pvt. Ltd.

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Date:Jul 28, 2010
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