With enough patience, a hybrid strategy of value investing and growth investing can create significant wealth for investors. This is because buying businesses that are quickly growing at a discounted valuation leads to eventual valuation upside, on top of the earnings growth that leads to share price growth.
Centene (CNC 0.59%) appears to offer investors an excellent mix of value and growth. Shares of the managed care company soared 37% in 2021 and slipped less than 1% in 2022. That was far better than the S&P 500 index's 27% gain in the former year and 19% loss in the latter year.
And there's reason to believe that Centene could crush the S&P 500 index again in 2023. Here's why.
NYSE: CNC
Key Data Points
The future growth outlook is solid
As of Sept. 30, Centene's membership base across its Medicaid, commercial (i.e., Marketplace), Medicare, and TRICARE (e.g., military member and family member insurance) customers was 26.8 million. Unsurprisingly, this massive membership base helped the company's market capitalization to grow to $43 billion. This positions it as the sixth-biggest health insurer in the United States.
The St. Louis-based company has a bright future ahead as a leader in the fast-growing health insurance industry. The rising cost burden of chronic medical conditions is likely to keep membership growing. Market research firm Precedence Market Research anticipates the global health insurance market will grow at 6.8% annually from $2.1 trillion in 2021 to reach $3.8 trillion by 2030.
The $141.5 billion in revenue that analysts expect from Centene in 2023 is large in absolute terms. But stacked up against the $2.4 trillion that the health insurance industry is expected to generate in 2023, the company's modest 6% market share gives it plenty of room for future growth. This explains how analysts believe that Centene will deliver 11.1% annual non-GAAP (adjusted) diluted earnings per share (EPS) growth over the next five years. Putting this into perspective, that is comparable to the healthcare plans industry average earnings growth forecast of 12.4%.
Image source: Getty Images.
Strong financial conditioning
Centene's future is promising -- and what makes the stock an even better pick is the state of its balance sheet. Analysts estimate that Centene will carry $1.1 billion in net debt in 2023. Against the $5.7 billion in projected earnings before interest, taxes, depreciation, and amortization (EBITDA), this is a net debt-to-EBITDA ratio of just 0.2. And thanks to impressive free cash flow production, the company could swing to nearly $700 million in net cash by 2024. Centene's admirable financial strength should give the company the flexibility to execute bolt-on acquisitions without hesitation to build on its competitive advantages.
A wonderful, discounted business
As if Centene's encouraging fundamentals weren't enough to entice investors to buy the stock, the valuation is the cherry on top that makes it a no-brainer buy. The health insurer is trading at a forward price-to-earnings (P/E) ratio of 12, which is well below the healthcare plans industry average forward P/E ratio of 14.7. Even accounting for Centene's slightly below-average growth prospects for its industry, the company is arguably worthy of trading at a moderately higher valuation multiple.
Thus, analysts have an average 12-month price target of $99 for the stock. That's a staggering 30% upside from the current $76 share price.
