A common saying is that you only need a few big winners to get rich as an investor because one 10-bagger investment more than makes up for several smaller losing ones.
To call the health insurer Centene (CNC -0.15%) a big winner almost seems like an understatement: A $10,000 investment in the stock 10 years ago would now be worth around $94,000, which is equivalent to about a 25.1% compound annual growth rate. For context, a $10,000 investment in the S&P 500 index would have grown to approximately $35,000 with dividends reinvested. This works out to a 13.5% annual total return rate.
But is Centene still a buy for growth investors? Let's take a look at its fundamentals and valuation to find out.
A rapidly growing business
When Centene shared financial results for its second quarter (which ended June 30) late last month, the company continued its winning ways.
The health insurer reported a 15.8% year-over-year surge in total revenue to $35.9 billion during the quarter. This came in a bit above the average analyst revenue forecast of $35.6 billion for the second quarter. How did Centene top the analyst revenue consensus for the ninth of the last 10 quarters?
The company's total membership had increased 7.2% year over year to 26.4 million at the end of the second quarter. This was driven by solid growth in Centene's Medicare and Medicaid businesses and the acquisition of the managed healthcare company Magellan Health. In addition to a higher membership base, Centene collected higher premiums from its customers than in the year-ago period. This explains how the company's revenue grew at a double-digit clip during the quarter.
Centene recorded $1.77 in non-GAAP (adjusted) diluted earnings per share (EPS) in the second quarter, which is a sizzling 41.6% year-over-year growth rate. This was meaningfully above the average analyst adjusted diluted EPS prediction of $1.59. And it represented the fifth quarter out of the past 10 in which the company surpassed that analyst forecast.
Aside from Centene's higher revenue base, its non-GAAP net margin climbed 50 basis points higher year over year to 2.9% during the quarter. The company's improved profitability was only partially offset by a minuscule increase in the outstanding share count from 582.8 million in the year-ago period to 583.6 million in the second quarter.
Centene's earnings growth should remain high for the foreseeable future. Increasing demand for health insurance and bolt-on acquisitions is why analysts believe Centene's adjusted diluted EPS will compound at 12.3% annually through the next five years.
The company is financially sound
Centene's business is thriving. But even with that being the case, it's always a good idea to examine a company's balance sheet as well. That's because if a business encounters a rough patch, its financial health could be the difference between life and the proverbial death of bankruptcy.
Centene carried a net debt balance of $3.5 billion as of June 30, a manageable load for the company to carry for its size. This is supported by the fact that the company's earnings before interest, taxes, depreciation and amortization (EBITDA) was nearly $2 billion through the first half of 2022.
A favorable valuation for investment
Centene appears to be an exceptional business, yet the stock remains reasonably valued at the current share price.
Centene's forward price-to-earnings (P/E) ratio of 15.3 is just below the healthcare plans industry average forward P/E ratio of 16.9. The annual earnings growth potential of the company is 12.3%, which is essentially in line with the industry average of 12.6%. This arguably means that the business is a tad undervalued for its fundamentals, making it a buy for investors seeking inflation-beating, double-digit annual total returns over the long haul.