Centene Corp (CNC, Financial), a prominent managed-care organization, experienced a daily gain of 1.78%, despite a 3-month loss of -8.11%. With an Earnings Per Share (EPS) of 4.85, the question arises: Is the stock significantly undervalued? This article aims to answer this question through a comprehensive valuation analysis. So, let's get started!
Company Overview
Centene Corp (CNC, Financial) is a leading managed-care organization, primarily focusing on government-sponsored healthcare plans, including Medicaid, Medicare, and individual exchanges. As of September 2022, Centene served 23 million medical members, most of whom were enrolled in Medicaid (70%), individual exchanges (9%), and Medicare Advantage (7%). The company also caters to 4 million users through the Medicare Part D pharmaceutical program.
With a current stock price of $62.98, Centene's market cap stands at $34.10 billion. However, according to the GuruFocus proprietary measure of a stock's intrinsic value, the GF Value, Centene's fair value is estimated to be $89.99. This discrepancy suggests that the stock might be significantly undervalued.
GF Value: A Comprehensive Valuation Method
GF Value is a unique valuation method that offers an estimation of a stock's intrinsic value. This estimation is based on three key factors: historical multiples at which the stock has traded, an internal adjustment factor based on the company's past performance and growth, and future business performance estimates. The GF Value Line represents the stock's ideal fair trading value.
According to the GF Value, Centene (CNC, Financial) appears to be significantly undervalued. If the stock's price is significantly below the GF Value Line, it suggests that the stock is undervalued and likely to offer high future returns. Given Centene's current price of $62.98 per share and a market cap of $34.10 billion, the stock seems to be significantly undervalued.
Given this significant undervaluation, the long-term return of Centene's stock is likely to be much higher than its business growth.
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Centene's Financial Strength
Investing in companies with low financial strength could result in permanent capital loss. Therefore, it's crucial to review a company's financial strength before deciding to buy shares. Centene's cash-to-debt ratio of 0.91 ranks worse than 63.16% of 19 companies in the Healthcare Plans industry. Based on this, GuruFocus ranks Centene's financial strength as 6 out of 10, suggesting a fair balance sheet.
Centene's Profitability and Growth
Companies that have been consistently profitable over the long term offer less risk for investors. Centene has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $147.90 billion and Earnings Per Share (EPS) of $4.85. Its operating margin is 2.36%, which ranks worse than 53.33% of 15 companies in the Healthcare Plans industry. Overall, the profitability of Centene is ranked 8 out of 10, which indicates strong profitability.
Growth is a crucial factor in a company's valuation. Centene's 3-year average revenue growth rate is worse than 55.56% of 18 companies in the Healthcare Plans industry. Centene's 3-year average EBITDA growth rate is 2.1%, which ranks worse than 58.82% of 17 companies in the Healthcare Plans industry.
ROIC vs WACC
Comparing a company's return on invested capital (ROIC) to its weighted cost of capital (WACC) is another way to evaluate its profitability. ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Centene's ROIC was 3.67, while its WACC came in at 5.77.
Conclusion
In summary, the stock of Centene (CNC, Financial) is estimated to be significantly undervalued. The company's financial condition is fair, and its profitability is strong. However, its growth ranks worse than 58.82% of 17 companies in the Healthcare Plans industry. To learn more about Centene stock, you can check out its 30-Year Financials here.
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