Becoming a successful investor doesn't require a crystal ball: All you need is a viable theme for your investment thesis and a long-term investing mindset. More times than not with these two attributes, your investments will turn out to be profitable over the long run.
A mounting disease burden and a growing elderly population are just two of the numerous factors that could be growth catalysts in the long haul for the health insurance industry. This is why the market research company named Precedence Research expects that the global health insurance market will compound at 6.8% annually from $2.2 trillion in 2022 to reach almost $3.8 trillion by 2030.
Centene (CNC 0.39%) could emerge as one of the biggest winners from these trends that are favorable to health insurers. Here's why.
1. Secular tailwinds bode well for future growth
With more than 27 million members of its Medicaid, Health Insurance Marketplace, Medicare, and TRICARE plans (i.e., insurance for members of the military and their families), Centene is a major health insurer. The company's $40 billion market capitalization makes it the sixth-biggest publicly traded healthcare plan business in the world.
Centene's total revenue surged 9% year over year to $35.6 billion during the fourth quarter (ended Dec. 31). This healthy jump in total revenue was driven by two variables in the quarter.
First, the Missouri-based health insurer's total plan membership base edged 4.8% higher over the year-ago period to 27.1 million for the quarter. This was due to both organic growth in its membership base from rising demand for health insurance, as well as its acquisition of the managed health company called Magellan Health. Second, price hikes on its plans also fueled total revenue growth.
Centene's non-GAAP (adjusted) diluted earnings per share (EPS) fell 14.9% year over year to $0.86 during the fourth quarter. Faster growth in medical costs than revenue (11.3%) led to a nearly 50 basis point drop in non-GAAP net margin to 1.4% in the quarter. Centene only partially offset this decrease in profitability with a 5.4% reduction in its weighted-average diluted outstanding share count. This explains how the company's adjusted diluted EPS contracted for the quarter while total revenue grew.
Centene's profitability is expected to normalize and total revenue should continue to trend higher. This is why analysts believe that the company's adjusted diluted EPS will rise by 11.2% annually over the next five years. For context, this is just below the healthcare plans industry average earnings growth forecast of 12.4%.
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2. The balance sheet is a major strength
If Centene's steadily growing business wasn't enough to convince investors that it could be an excellent growth stock, the company's financial health may do just that.
It is projected that Centene will possess a net cash position of $185 million in 2023. Compared to the $5.6 billion in earnings before interest, taxes, depreciation, and amortization (EBITDA) predicted for the year, that means the company's net debt to EBITDA ratio will be -0.03. This is a huge positive in an environment where interest rates will likely remain elevated for at least the next year. Such a robust financial condition gives Centene the ability to execute savvy acquisitions and grow its business in the future.
3. An ultra-low valuation
Centene's valuation is what really sets it apart as an investment. The stock's forward price-to-earnings (P/E) ratio of 10 is absurdly below the healthcare plans industry average forward P/E ratio of 13.9. Even considering its slightly below-average earnings growth prospects, such a deeply discounted valuation makes the stock a no-brainer buy for investors seeking a blend of value and growth. This is precisely why analysts have a 12-month price target far above the current $73 share price.
