Centene: Strong Buy, For All The Wrong Reasons

Core Viewpoint - Centene Corporation (NYSE: CNC) is initiated with a Strong Buy rating, reflecting a positive outlook on the company's potential value and performance [1]. Valuation Methodology - The article discusses various methods sell-side analysts use to determine a company's fair value, highlighting the limitations of traditional approaches like DCF and multiples [1]. - A reverse valuation approach is proposed, which starts from the market price and discount rate to uncover the free cash flow assumptions embedded in the price, providing a more realistic assessment of the company's worth [1]. - The Free Cash Flow to Equity (FCFE) model is utilized to calculate what truly belongs to shareholders, focusing on earnings, amortization, and investments while ignoring working capital and debt changes [1]. Forecasting Approach - The H-model is applied for forecasts, which incorporates a 10-year two-stage growth fade, with terminal growth aligned to the risk-free rate, specifically the 10-year government bond yield [1]. - All cash flows are discounted using the cost of equity, calculated as the risk-free rate multiplied by beta plus a 5% equity risk premium (ERP), resulting in a clear picture of the business's intrinsic value [1].