Centene (CNC)

Health coverage company Centene (NYSE:CNC) announced better-than-expected revenue in Q4 CY2025, with sales up 21.9% year on year to $49.73 billion. On the other hand, the company’s full-year revenue guidance of $188.5 billion at the midpoint came in 2.1% below analysts’ estimates. Its non-GAAP loss of $1.19 per share was 2.5% above 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 $194.8 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.

Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Luckily, Centene’s sales grew at a decent 11.9% compounded annual growth rate over the last five years. Its growth was slightly above the average healthcare company and shows its offerings resonate with customers.

We at StockStory place the most emphasis on long-term growth, but within healthcare, a half-decade historical view may miss recent innovations or disruptive industry trends. Centene’s annualized revenue growth of 12.5% over the last two years aligns with its five-year trend, suggesting its demand was stable.

We can dig further into the company’s revenue dynamics by analyzing its number of customers, which reached 27.63 million in the latest quarter. Over the last two years, Centene neither added nor lost customers. 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 21.9%, and its $49.73 billion of revenue topped Wall Street estimates by 3%.

Looking ahead, sell-side analysts expect revenue to remain flat over the next 12 months, a deceleration versus the last two years. This projection is underwhelming and suggests its products and services will see some demand headwinds.

Centene was roughly breakeven when averaging the last five years of quarterly operating profits, lousy for a healthcare business.

Looking at the trend in its profitability, Centene’s operating margin decreased by 5.3 percentage points over the last five years. The company’s two-year trajectory also shows it failed to get its profitability back to the peak as its margin fell by 5.8 percentage points. This performance was poor no matter how you look at it - it shows its expenses were rising and it couldn’t pass those costs onto its customers.

This quarter, Centene generated an operating margin profit margin of negative 3.5%, down 3.9 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.

Sadly for Centene, its EPS declined by 16.3% annually over the last five years while its revenue grew by 11.9%. This tells us the company became less profitable on a per-share basis as it expanded due to non-fundamental factors such as interest expenses and taxes.

We can take a deeper look into Centene’s earnings to better understand the drivers of its performance. As we mentioned earlier, Centene’s operating margin declined by 5.3 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its lower earnings; interest expenses and taxes can also affect EPS but don’t tell us as much about a company’s fundamentals.

In Q4, Centene reported adjusted EPS of negative $1.19, down from $0.80 in the same quarter last year. Despite falling year on year, this print beat analysts’ estimates by 2.5%. Over the next 12 months, Wall Street expects Centene’s full-year EPS of $2.05 to grow 55.4%.

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 2.5%, subpar for a healthcare business.

Centene broke even from a free cash flow perspective in Q4. This result was good as its margin was 2.3 percentage points higher than in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, leading to temporary swings. Long-term trends carry greater meaning.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Centene’s five-year average ROIC was negative 3.1%, meaning management lost money while trying to expand the business. Its returns were among the worst in the healthcare sector.

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.

Businesses that maintain a cash surplus face reduced bankruptcy risk.

Centene is a well-capitalized company with $20.32 billion of cash and $17.4 billion of debt on its balance sheet. This $2.92 billion net cash position is 14.9% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We enjoyed seeing Centene beat analysts’ revenue expectations this quarter. On the other hand, its full-year revenue guidance missed. Overall, this was a softer quarter. The stock traded down 2.2% to $39.05 immediately after reporting.

Before making an investment decision, investors should account for Centene’s business fundamentals and valuation in addition to what happened in the latest quarter.

Centene isn’t a terrible business, but it isn’t one of our picks. Although its revenue growth was good over the last five years, it’s expected to deteriorate over the next 12 months and its declining EPS over the last five years makes it a less attractive asset to the public markets. And while the company’s scale gives it meaningful leverage when negotiating reimbursement rates, the downside is its diminishing returns show management's prior bets haven't worked out.

Centene’s P/E ratio based on the next 12 months is 12.5x. This valuation multiple is fair, but we don’t have much faith in the company. We're fairly confident there are better investments elsewhere.

Wall Street analysts have a consensus one-year price target of $43.88 on the company (compared to the current share price of $39.05).