What a fantastic six months it’s been for Centene. Shares of the company have skyrocketed 94.3%, hitting $63.74. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is now the time to buy Centene, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is Centene Not Exciting?
We’re glad investors have benefited from the price increase, but we don’t have much confidence in Centene. Here are three reasons why CNC doesn’t excite us, plus one stock we’d rather own.
1. Declining Customer Base Reflects Product and Sales Weakness
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.
Centene’s total customers came in at 25.89 million in the latest quarter, and over the last two years, their count averaged 2.6% year-on-year declines. This performance was underwhelming and shows the company lost deals and renewals. It also suggests there may be increasing competition or market saturation. 
2. Previous Growth Initiatives Have Lost Money
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
Centene’s five-year average ROIC was negative 4.4%, meaning management lost money while trying to expand the business. Its returns were among the worst in the healthcare sector.
3. New Investments Fail to Bear Fruit as ROIC Declines
We like to invest in businesses with high returns, but the trend in a company’s ROIC can also be an early indicator of future business quality.
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 doesn’t pass our bar. After the recent surge, the stock trades at 14× forward P/E (or $63.74 per share). This valuation multiple is fair, but we don’t have much faith in the company. We’re pretty confident there are more exciting stocks to buy at the moment. We’d recommend looking at a dominant aerospace business that has perfected its M&A strategy.
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