Centene (CNC)

Health coverage company Centene (NYSE:CNC) reported Q2 CY2025 results beating Wall Street’s revenue expectations, with sales up 22.4% year on year to $48.74 billion. Its non-GAAP loss of $0.16 per share was significantly below analysts’ consensus estimates.

Company Overview

Serving nearly 1 in 15 Americans through its government healthcare programs, Centene (NYSE:CNC) is a healthcare company that manages government-sponsored health insurance programs like Medicaid and Medicare for low-income and complex-needs populations.

Upfront premiums collected by health insurers lead to reliable revenue, but profitability ultimately depends on accurate risk assessments and the ability to control medical costs. Health insurers are also highly sensitive to regulatory changes and economic conditions such as unemployment. Going forward, the industry faces tailwinds from an aging population, increasing demand for personalized healthcare services, and advancements in data analytics to improve cost management. However, continued regulatory scrutiny on pricing practices, the potential for government-led reforms such as expanded public healthcare options, and inflation in medical costs could add volatility to margins. One big debate among investors is the long-term impact of AI and whether it will help underwriting, fraud detection, and claims processing or whether it may wade into ethical grey areas like reinforcing biases and widening disparities in medical care.

Centene's main competitors in the government-sponsored healthcare space include UnitedHealth Group's (NYSE: UNH) Optum division, Elevance Health (NYSE: ELV) formerly known as Anthem, Humana (NYSE: HUM), Molina Healthcare (NYSE: MOH), and CVS Health's (NYSE: CVS) Aetna division.

Larger companies benefit from economies of scale, where fixed costs like infrastructure, technology, and administration are spread over a higher volume of goods or services, reducing the cost per unit. Scale can also lead to bargaining power with suppliers, greater brand recognition, and more investment firepower. A virtuous cycle can ensue if a scaled company plays its cards right.

With $178.2 billion in revenue over the past 12 months, Centene is one of the most scaled enterprises in healthcare. This is particularly important because health insurance providers companies are volume-driven businesses due to their low margins.

A company’s long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last five years, Centene grew its sales at a solid 14.2% compounded annual growth rate. Its growth beat the average healthcare company and shows its offerings resonate with customers, a helpful starting point for our analysis.

Long-term growth is the most important, but within healthcare, a half-decade historical view may miss new innovations or demand cycles. Centene’s annualized revenue growth of 9.8% over the last two years is below its five-year trend, but we still think the results were respectable.

We can better understand the company’s revenue dynamics by analyzing its number of customers, which reached 28 million in the latest quarter. Over the last two years, Centene’s customer base averaged 1.2% year-on-year growth. Because this number is lower than its revenue growth, we can see the average customer spent more money each year on the company’s products and services.

This quarter, Centene reported robust year-on-year revenue growth of 22.4%, and its $48.74 billion of revenue topped Wall Street estimates by 11.6%.

Looking ahead, sell-side analysts expect revenue to remain flat over the next 12 months, a deceleration versus the last two years. This projection doesn't excite us and suggests its products and services will face some demand challenges. At least the company is tracking well in other measures of financial health.

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Centene’s operating margin might fluctuated slightly over the last 12 months but has remained more or less the same, averaging 1.5% over the last five years. This profitability was lousy for a healthcare business and caused by its suboptimal cost structure.

Looking at the trend in its profitability, Centene’s operating margin might fluctuated slightly but has generally stayed the same over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

This quarter, Centene’s breakeven margin was down 4 percentage points year on year. This contraction shows it was less efficient because its expenses grew faster than its revenue.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Centene’s flat EPS over the last five years was below its 14.2% annualized revenue growth. However, its operating margin didn’t change during this time, telling us that non-fundamental factors such as interest and taxes affected its ultimate earnings.

In Q2, Centene reported EPS at negative $0.16, down from $2.42 in the same quarter last year. This print missed analysts’ estimates. Over the next 12 months, Wall Street expects Centene’s full-year EPS of $5.16 to shrink by 24.8%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Centene has shown mediocre cash profitability over the last five years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 2.7%, subpar for a healthcare business.

Taking a step back, we can see that Centene’s margin dropped by 1.8 percentage points during that time. If the trend continues, it could signal it’s in the middle of an investment cycle.

Centene’s free cash flow clocked in at $1.58 billion in Q2, equivalent to a 3.2% margin. The company’s cash profitability regressed as it was 1.8 percentage points lower than in the same quarter last year, suggesting its historical struggles have dragged on.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Although Centene has shown solid business quality lately, it historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 4.3%, lower than the typical cost of capital (how much it costs to raise money) for healthcare companies.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Centene’s ROIC averaged 2.4 percentage point increases each year. its rising ROIC is a good sign and could suggest its competitive advantage or profitable growth opportunities are expanding.

Centene reported $17.28 billion of cash and $17.58 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $3.05 billion of EBITDA over the last 12 months, we view Centene’s 0.1× net-debt-to-EBITDA ratio as safe. We also see its $688 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We liked that Centene beat analysts’ revenue expectations this quarter. On the other hand, EPS missed significantly due to lower payments from the government, higher medical costs, more expensive care for Medicaid members. Management called the results "disappointing" and are addressing the issues in the business. Shares traded down 12.2% to $23.51 immediately following the results.

Updated: July 27, 2025 at 11:53 PM EDT

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Centene.

There are a lot of things to like about Centene. To kick things off, its revenue growth was solid over the last five years. And while its unimpressive EPS growth over the last five years shows it’s failed to produce meaningful profits for shareholders, its scale gives it meaningful leverage when negotiating reimbursement rates. On top of that, its rising returns show management's prior bets are starting to pay off.

Centene’s P/E ratio based on the next 12 months is 7.3x. Looking at the healthcare landscape right now, Centene trades at a pretty interesting price. For those confident in the business and its management team, this is a good time to invest.

Wall Street analysts have a consensus one-year price target of $44.40 on the company (compared to the current share price of $28.42), implying they see 56.2% upside in buying Centene in the short term.