Centene Corp. CNC appears a solid bet, riding high on core strength and earnings growth prospects. The company’s inorganic growth strategies have positioned it well for future improvement.
Analysts seem to be optimistic about the company’s fundamentals as the stock has been witnessing upward estimate revisions. The stock has seen the Zacks Consensus Estimate for current-year earnings per share being revised 1.4% upward to $4.98 over the past 60 days.
Also last year, the stock has witnessed a whopping rally of 72%, substantially outperforming the industry’s gain of 37%.
Factors That Make the Stock an Attractive Pick
Solid Rank & VGM Score: Centene has a Zacks Rank #2 (Buy) and a VGM Score of B. Our research shows that stocks with a VGM Score of A or B combined with a favorable Zacks Rank #1 (Strong Buy) or 2, offer the best investment opportunities for investors. Thus, the company looks a compelling investment proposition at the moment.
Positive Earnings Surprise History: Centene boasts an impressive earnings surprise history. The company has outpaced the Zacks Consensus Estimate in each of the trailing four quarters, delivering an average beat of 10.6%.
2017 Guidance Raise: Centene expects adjusted earnings per share in the range of $4.86-$5.04 compared with the previous view of $4.70-$5.06, reflecting an 11.7% year-over-year rise. Total revenues are expected in the band of $47.4-$48.2 billion compared with the former outlook of $46.4-$47.2 billion, representing a 17.7% year-over-year increase. This increased guidance boosts investors' optimism on the stock.
Revenue Strength: Centene has been witnessing a consistent and significant revenue growth since 2002. The metric has witnessed a CAGR of 50.8% from 2011 to 2016 and the momentum continued in the first nine months of 2017. This upside is supported by growth in the existing markets, expansion into new markets and widening of product offerings. The company’s top line is expected to grow 17.8% in 2017 and 7.8% in 2018.
Steady Growth Through Acquisitions: Centene has been steadily expanding inorganically. Its merger and acquisition (M&A) strategy is mainly aimed at broadening the company’s markets and increasing its Medicaid membership. A notable acquisition made by the company was Health Net from last year that substantially drove its top line.
In September, the company announced to buy Fidelis Care, which would help the company grow its government sponsored healthcare coverage with a leadership position in New York. This strategic move would further significantly improve the company’s earnings per share upon completion of the takeover in the first quarter of 2018. Given its strong liquidity position, the company will likely continue with its inorganic growth policies.
Strong Balance Sheet: Net cash inflow from operations that has financed most of the company’s growth-oriented investments has been increasing since 2010. In 2016, the company witnessed a year-over-year surge of 181% in its $1.85 billion of net cash from operating activities. For the first nine months of 2017, cash inflow from operations was $1,039 million compared with $259 million in the prior-year period. This prudent financial position is expected to pave the way for the company's all growth-oriented investments.
Undervalued: The stock’s valuation looks attractive at present, trading at a forward 12-month price-to-earnings (P/E) ratio of 19.6 which compares with the 5-year trading range of 18.6-35.2. The same is also lower than the industry’s P/E ratio of 20.7.
Other Stocks to Consider
A few other stocks in the same space are WellCare Health Plans Inc. WCG, Triple-S Management Corp. GTS and The Joint Corp. JYNT.
While both WellCare Health Plans and Triple-S Management sport a Zacks Rank of 1, The Joint Corp. carries the same bullish Zacks Rank of 2 as Centene. You can see the complete list of today’s Zacks #1 Rank stocks here.
WellCare delivered positive surprises in each of the last four quarters with an average beat of 64.3%.
Triple-S Management pulled off positive surprises in two of the trailing four quarters with an average beat of 74%.
The Joint Corp. beat estimates in three of the four reported quarters with an average positive surprise of 5.5%.
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