Centene’s 22% return over the past six months has outpaced the S&P 500 by 12.1%, and its stock price has climbed to $41.20 per share. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is there a buying opportunity in Centene, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free for active Edge members.
Why Is Centene Not Exciting?
We’re happy investors have made money, but we're swiping left on Centene for now. Here are three reasons there are better opportunities than CNC and a stock we'd rather own.
1. Customer Base Hits a Plateau
Revenue growth can be broken down into the number of customers and the average spend per customer. Both are important because an increasing customer base leads to more upselling opportunities while the revenue per customer shows how successful a company was in executing its upselling strategy.
Over the last two years, Centene’s total customers were flat, coming in at 27.97 million in the latest quarter. This performance was underwhelming and shows the company faced challenges in landing new contracts. It also suggests there may be increasing competition or market saturation. 
2. EPS Trending Down
Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for Centene, its EPS declined by 5.1% annually over the last five years while its revenue grew by 12.8%. This tells us the company became less profitable on a per-share basis as it expanded.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
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 has unfortunately decreased significantly. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
Centene isn’t a terrible business, but it isn’t one of our picks. With its shares beating the market recently, the stock trades at 17.7× forward P/E (or $41.20 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're pretty confident there are superior stocks to buy right now. We’d recommend looking at one of our top digital advertising picks.
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