Centene (CNC)

Health coverage company Centene (NYSE:CNC) announced better-than-expected revenue in Q1 CY2025, with sales up 15.4% year on year to $46.62 billion. The company’s full-year revenue guidance of $180 billion at the midpoint came in 4.2% above analysts’ estimates. Its non-GAAP profit of $2.90 per share was 15.3% 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 $169.3 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 performance is an indicator of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Thankfully, Centene’s 15.5% annualized revenue growth over the last five years was solid. Its growth beat the average healthcare company and shows its offerings resonate with customers, a helpful starting point for our analysis.

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 7.6% over the last two years is below its five-year trend, but we still think the results were respectable.

We can dig further into the company’s revenue dynamics by analyzing its number of customers, which reached 27.94 million in the latest quarter. Over the last two years, Centene’s customer base averaged 2.3% 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 year-on-year revenue growth of 15.4%, and its $46.62 billion of revenue exceeded Wall Street’s estimates by 8.3%.

Looking ahead, sell-side analysts expect revenue to grow 2.4% 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 was profitable over the last five years but held back by its large cost base. Its average operating margin of 1.9% was weak for a healthcare business.

Looking at the trend in its profitability, Centene’s operating margin decreased by 1.3 percentage points over the last five years, but it rose by 1.3 percentage points on a two-year basis. We like Centene and hope it can right the ship.

This quarter, Centene generated an operating profit margin of 3.3%, in line with the same quarter last year. This indicates the company’s overall cost structure has been relatively stable.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Centene’s spectacular 14.8% annual EPS growth over the last five years aligns with its revenue performance. This tells us it maintained its per-share profitability as it expanded.

In Q1, Centene reported EPS at $2.90, up from $2.26 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Centene’s full-year EPS of $7.74 to stay about the same.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

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 3%, subpar for a healthcare business.

Taking a step back, we can see that Centene’s margin dropped by 3.4 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 $1.38 billion in Q1, equivalent to a 2.9% margin. Its cash flow turned positive after being negative in the same quarter last year. We hope the company can build on this trend.

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 5.5%, somewhat low compared to the best healthcare companies that consistently pump out 20%+.

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. On average, Centene’s ROIC increased by 1.9 percentage points annually over the last few years. its rising ROIC is a good sign and could suggest its competitive advantage or profitable growth opportunities are expanding.

Centene reported $17.29 billion of cash and $18.32 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 $4.93 billion of EBITDA over the last 12 months, we view Centene’s 0.2× net-debt-to-EBITDA ratio as safe. We also see its $736 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 were impressed by how significantly Centene blew past analysts’ revenue expectations this quarter. We were also glad its full-year revenue guidance trumped Wall Street’s estimates. On the other hand, its customer base missed and its full-year EPS guidance fell slightly short of Wall Street’s estimates. Overall, we think this was a mixed quarter. The stock remained flat at $61.58 immediately after reporting.

Updated: May 21, 2025 at 11:54 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.

Centene possesses a number of positive attributes. To kick things off, its revenue growth was solid over the last five years. And while its operating margins are low compared to other healthcare companies, its scale gives it meaningful leverage when negotiating reimbursement rates. On top of that, its spectacular EPS growth over the last five years shows its profits are trickling down to shareholders.

Centene’s P/E ratio based on the next 12 months is 7.9x. Looking at the healthcare landscape right now, Centene trades at a pretty interesting price. If you trust the business and its direction, this is an ideal time to buy.

Wall Street analysts have a consensus one-year price target of $78.16 on the company (compared to the current share price of $60.74), implying they see 28.7% upside in buying Centene in the short term.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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