The managed care insurance sector is facing unprecedented challenges, making it one of the most abandoned areas in the current market. Negative headlines, downward earnings revisions, and withdrawn guidance are rampant, causing stocks to plummet across the board. Amidst this widespread pessimism, Centene Corporation (NYSE: CNC) stands out as a company trading at what appears to be a historic low. While the immediate future remains uncertain, the current climate could present a generational buying opportunity for long-term investors.
Record Pessimism and Long-Term Outlook
The current level of pessimism surrounding managed care is record-breaking. While regulatory and reimbursement issues periodically impact the sector, the current downturn is more severe than previously observed. Despite the immediate headwinds, the fundamental models of these businesses are not expected to change significantly in the long term. Historically, periods of extreme negativity have rewarded patient buyers. A potential shift in political power in Congress, just over a year away, could also bring about policy changes that benefit the sector. Centene has largely “kitchen-sinked” its issues, and its stock is now moving in sympathy with its peers as the selloff continues. We believe there’s substantial long-term value to be unlocked in this sector, and Centene, in particular, warrants consideration for a long-term investment.
Headwinds Galore: Regulatory and Operational Challenges
Centene is grappling with a multitude of headwinds. Regulatory pressures are significant, with the “Big Beautiful Bill” not favoring insurers. The company faces exposure to slowing end markets in Medicaid and the Affordable Care Act (ACA) exchanges. A major concern is the possible expiration of exchange subsidies this year, which could lead to building enrollment headwinds for Medicaid in the coming years, though this remains to be seen and future Congresses could enact changes. “Work requirements” are also cited as a headwind.
The most significant factor contributing to Centene’s stock decline, beyond the broader sector issues, is the withdrawal of its guidance due to a substantial increase in medical costs. This mirrors challenges experienced by competitors. While the market’s severe reaction was somewhat surprising, it suggests an overshoot to the downside, potentially setting up a “reversion to the mean” trading opportunity.
Why Centene is Trading So Poorly: Unpacking the Cost Surprises
A decade of gains for Centene’s stock has been erased. The primary reason for this poor performance stems from a recent review of industry Health Insurance Marketplace data for 2025. Centene’s analysis, covering 22 of its 29 Marketplace states (representing approximately 72% of its Marketplace membership), indicated lower-than-expected overall market growth. More alarmingly, similar to other competitors, patients are presenting with much higher morbidity than anticipated. This higher morbidity means that medical costs are “materially inconsistent with” Centene’s previous assumptions.
As a result, Centene anticipates significantly higher costs ahead, with an estimated adjusted diluted EPS impact of approximately $2.75 for the year. This represents a staggering reduction, amounting to more than a third of previously expected earnings. While data for the remaining seven states is unavailable, the company assumes similar trends, implying that the EPS hit could be even greater, a notion seemingly supported by recent Q2 results.
What Centene Can Do: Repricing and Cost Management
In response to these challenges, Centene is taking corrective actions. For the 2026 Marketplace plan year, the company is refiling its rates to account for a much higher projected baseline of Marketplace benefit usage. These corrective pricing actions will be implemented in most states. The surge in Medicaid costs is largely attributed to behavioral health, home health, and higher-dollar prescriptions, particularly notable in New York and Florida.
Despite the widespread negative news, there was a glimmer of positivity. Centene’s Medicare Advantage and Medicare Prescription Drug Plan businesses are “performing better than expected” in Q2 2025. The company is also implementing internal expense reduction initiatives, aiming to improve selling, general, and administrative (SG&A) expense leverage on its consolidated premium and service revenue growth.
Earnings Update and Outlook for 2025
The recently reported earnings confirmed much of what was anticipated from the previously pulled guidance. While revenue was a significant beat at $48.74 billion (a $4.5 billion beat against consensus and up 22.3% year-over-year), the good news largely ends there. The company reported a rare loss of $0.16 per share, missing consensus by $0.39. This unprecedented loss is primarily due to a health benefits ratio of 93%, indicating significantly higher utilization of care. It appears Centene is already looking ahead to 2026 for a turnaround.
On the balance sheet, Centene reported $37.5 billion in investments and deposits and $234 million in cash and cash equivalents. However, medical claims liabilities totaled a substantial $20.1 billion, with days in claims payable at 47 days. The company’s total debt stands at $17.6 billion, though it has no borrowings on its $4.0 billion revolving credit facility, indicating manageable debt servicing through cash flows.
During the earnings call, Centene expressed disappointment and reiterated its focus on restoring profitability in the Marketplace business. While the Medicare Advantage business aims to break even by 2027, the Marketplace book continues to face challenges, with the shortfall in risk-adjusted revenue persisting. The updated full-year outlook now incorporates the high utilization trends.
The company further elaborated on the impact of the actuarial data, stating that Marketplace earnings will be impacted by $2.4 billion, up from the previous estimate of $1.8 billion. This is driven by three factors: healthier members leaving the Marketplace post-pricing, new sign-ups exhibiting higher morbidity (with unknown reasons), and more aggressive provider coding alongside increased usage leading to massive utilization increases. As a result, the product will run below breakeven for the year. Centene has already filed 2026 pricing in many states, which is expected to return the company to profitability. The goal is to reprice the entire book. Medicaid also fell short of expectations with a 94.9% benefit ratio due to previously known home health, behavioral health, and drug costs.
The outlook for 2025 is grim, with the market seemingly pricing in the company’s “obliteration.” Centene is actively pursuing rate adjustments to mitigate most of this impact, but 2025 will undoubtedly suffer. The targeted EPS for the year is $1.75, a sharp decline from over $7 previously.
A “Blood in the Streets” Opportunity: Our Thesis
We view the current situation as a “blood in the streets” moment, suggesting a contrarian buying opportunity. Our thesis is straightforward:
- Regulatory damage has already been done: Much of the negative regulatory impact is already priced into the stock.
- Pricing adjustments underway: Centene is actively working to adjust its pricing to reflect the current utilization trends, which should improve profitability in the future.
- Long-term tailwinds from health trends: We anticipate that the proliferation of weight-loss drugs will reduce obesity-related morbidities in the longer term, leading to cost savings. Additionally, increased utilization of behavioral health benefits, while painful in the near term, should ultimately improve overall well-being, potentially reducing substance abuse and unhealthy eating habits, thus benefiting the health of the served populations in the long run.
Looking Ahead: A Focus on 2026
Projecting EPS for Centene in the near term is challenging. Despite the cost pressures, we still expect revenue to grow by 7-10% this year. However, EPS is likely to be cut by half or more from last year. If cost savings are effectively implemented and utilization is even slightly less than projected, EPS could reach the high $2 range, valuing shares at approximately 12x forward EPS. At the current $1.75 EPS target, this represents a 13.7x forward multiple. In a worst-case scenario with ongoing pressures, EPS could fall to as low as $1, making the stock appear expensive at 24x.
Many factors could drive earnings higher, but Centene’s focus is firmly on 2026, when a return to growth is expected. The company anticipates improvement across all business lines in 2026 compared to 2025. Whether the market will assign a higher multiple at that point remains to be seen with future earnings updates. We recommend investors consider initiating a starter position and adding to it on any further weakness. A significant amount of negative news appears to be already priced into the stock.