Valens Research

CNC - Valens Credit Report - 2022 08 11

Cash bond markets are overstating CNC's credit risk with a YTW of 4.607% relative to an Intrinsic YTW of 3.367%, while CDS markets are materially overstating CNC's credit risk with a CDS of 229bps relative to an Intrinsic CDS of 69bps. Furthermore, Moody's is overstating CNC's fundamental credit risk with its Ba1 credit rating three notches below Valens' IG4+ (Baa1) credit rating.

Incentives Dictate Behavior™ analysis highlights mixed signals for credit holders. Management's compensation framework should drive them to focus heavily on margin expansion and revenue growth, which may lead to Uniform ROA improvement and higher cash flows available for servicing obligations. Moreover, most management members have low change-in-control compensation relative to their average compensation, indicating they are unlikely to pursue a takeover or accept a sale of the company, decreasing event risk for creditors.

Earnings Call Forensics™ of the firm's Q2 2022 earnings call (7/26) highlights that management is confident they completed their recent divestiture of Panther, a key milestone in their portfolio review initiative, and that the Panther divestiture will lower SG&A costs. Furthermore, they are confident they are vigilant about monitoring inflation related cost increases and that they have the dashboards in place to react to and execute changes in Medicare initiatives.
Centene Corporation

Centene is an insurance holding company. The company's Managed Care segment provides health plan coverage to individuals through government subsidized programs. The company also provides a variety of individual, small group, and large group commercial healthcare products, both to employers and directly to members in the Managed Care segment. The company's Specialty Services segment consists of the company's specialty companies prviding healthcare services and products to state programs, correctional facilities, healthcare organizations, employer groups and other commercial organizations, as well as to its own subsidiaries. The Specialty Service segment also includes the Government Contracts business.

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In 2009, just as the dust was settling from the last major equity and credit market crises, we launched a boutique research firm with the intention of breaking Wall Street’s biases and broken incentives:

  • GAAP and IFRS have failed to provide rules for reliable financial statement reporting
  • Stock analyst recommendations are not grounded in disciplined financial analysis
  • Credit agencies have been set up to grossly fail in their responsibilities to investors and the public markets
  • Utter lack of willingness of major research firms to employ the the most advanced forensic analysis available

We sought to provide investors and company analysts with a source of information that changed all that.
Many years later, our business model remains because little has changed on Wall Street.

  • Corporate credit ratings remain years behind the fundamental underpinnings of company performance
  • Stock analysts continue to make recommendations with deeply inherent biases
  • Research firms have failed to break down the walls between credit, equity, and macroeconomic research
  • The governing accounting bodies have created more leeway for mis-estimates and mis-classifications as financials have become unwieldy and overwhelming

The integrity of Valens Research is founded in our disciplined processes and analytics. No “star” analysts. No corporate advisory relationships. No-nonsense opinions and recommendations.

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