FBR Upgrades Centene To Outperform, Says 'Sell-Off Creates Opportunity'

In a report published Monday, FBR Capital Markets analyst Steven Halper upgraded the rating on Centene Corp (NYSE: CNC) from Market Perform to Outperform, while raising the price target from $80 to $90 to reflect the acquisition of Health, Net, Inc (NYSE: HNT).

Centene's shares have declined over concerns surrounding the company's long-term growth prospects after it announced the acquisition of Health Net.

"The acquisition brings along some unique attributes to Centene, along with a major presence in California. Health Net also adds many capabilities beyond Centene's historical Medicaid and specialty focus," analyst Steven Halper wrote.

In the report FBR Capital Markets noted, "We assume the combined company's growth rate over the next few years will be about half of our standalone Centene model."

Centene expects to realize $150 million in annual cost synergies by the second year after the close of the acquisition. Halper expects Centene to generate top-line growth in the mid-high-single-digit range for the next five years after factoring in Health Net. This compares with the earlier forecast of low-double-digit top-line growth.

"We continue to assume modest margin expansion and modest levels of capital expenditures. We forecast higher levels of statutory capital based on expectations of higher premium growth," Halper added.

The recent pullback in Centene's shares, expectations of continued strong performance and the acquisition of Health Net make the risk/reward trade-off more "compelling," the report stated.