AGP, CNC - Texas Medicaid Awards Largest in History

Texas announced the awards for its highly anticipated $10 billion Medicaid managed care program. The public MCOs dominated the RFP and captured most of the new contract awards.

This was the largest, and therefore the most highly anticipated Medicaid RFP in the history of the Medicaid program. Analysts believe the overall size of the Texas market after full implementation of this expansion will be roughly $12 billion, more than doubling its previous total. The operational start date is March 1, 2012, which suggests that the full earnings potential from these contracts will not be felt until 2013.

There are two major winners:

1) Amerigroup (NYSE:AGP) - AGP will remain the largest Medicaid plan in Texas and should generate around $1 billion in incremental revenue from the Texas expansion. Upon completion of the expansion, AGP should generate over $2.5 billion in annual revenues in Texas Medicaid.

2) Centene (NYSE:CNC) - Centene will generate around $1.5 billion of incremental new revenue in Texas expansion, thus continuing its hot streak as the company also recently won new contracts in both the Louisiana and Kentucky RFPs.

Here are some estimates of EPS impact across Tier-1 firms:

- Deutsche sees $0.40-0.60 2013 EPS impact for AGP, $0.55-0.83 for CNC.

- J.P. Morgan sees eventual run-rate EPS impact for both CNC and AGP to be about $0.50 per share additive

- Credit Suisse notes assuming a pretax margin of 3%, they estimate the following annualized aftertax EPS impact: AGP +36c, CNC +22c

- Barclays estimates that CNC will generate an incremental $0.25 in EPS in 2012, and an additional $0.54 in total run-rate EPS once the new members are fully phased in. They estimate that AMERIGROUP will generate an incremental $0.22 in EPS in 2012, and an additional $0.40 in total run-rate EPS once the new members are fully phased in.

Notablecalls: Considering AGP, CNC trade 10-11x EPS and the EPS impact is around $0.50 for both companies in 2013, both stocks should be up 3-4 pts (im sure some of the impact was already priced in).

Could be some more for AGP as the stock got crushed following earnings last week. I see Citigroup is raising their target on AGP to $76 (from $71) this morning.

Difficult to call any trades here but it's where the action will be this morning, I suspect.