Picking leaders in massive industries with promising growth trends tends to work out well for investors over the long term. This is because operating as a leader in an industry set for growth makes it easier to increase revenue and earnings over time, which leads to stock price growth.
An aging global population and the prevalence of sedentary lifestyles bode well for the health insurance industry. This is why market research firm Fortune Business Insights anticipates that the global health insurance industry could grow from $2.1 trillion in 2021 revenue to surpass $3 trillion in 2028.
One huge winner from these industry trends could be health insurer Centene (CNC -0.84%). Here's why.
1. Increasing medical membership is driving growth
Centene's medical membership base climbed to over 28 million as of March 31 across its Medicaid, Medicare, Tricare, and Health Insurance Marketplace plans. This significant customer base explains why the company's current market capitalization is $38 billion, which positions it as the sixth-largest publicly traded health insurer on the planet.
Centene recorded $38.9 billion in total revenue in the first quarter ended March 31, which was up 4.6% over the year-ago period. What was behind this growth in the top line?
The company logged an 8.5% year-over-year growth rate in its total medical membership to 28.5 million for the first quarter. A surge in Health Insurance Marketplace plan enrollment was responsible for approximately half of this growth. Steadily rising Medicaid enrollment across the United States largely contributed to the remaining growth in Centene's medical membership during the quarter.
Centene's non-GAAP (adjusted) diluted earnings per share (EPS) surged 15.3% higher over the year-ago period to $2.11 in the first quarter. Higher investment and other income and lower income tax expenses helped boost the health insurer's net margin by 10 basis points to 3% for the quarter. Coupled with a 6.2% reduction in Centene's diluted share count, this is how the company's adjusted diluted EPS growth came in ahead of revenue growth during the quarter.
Continued membership growth and share repurchases are why analysts believe that Centene's adjusted diluted EPS will compound by 10.6% annually through the next five years. For comparison, this is slightly less than the healthcare plans industry average annual earnings growth prediction of 12.1%.
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2. A financially healthy business
Analysts may be predicting solid growth from Centene over the medium term, but that means nothing if the company doesn't have the financial resources to execute its growth plans.
Fortunately, Centene appears to have the financial means to execute bolt-on acquisitions and maintain a strong balance sheet. The company's net debt position is anticipated to be $4.4 billion in 2023. Stacked against the $5.4 billion in earnings before interest, taxes, depreciation, and amortization (EBITDA) that analysts expect for the year, this works out to a net debt to EBITDA ratio of 0.8.
3. The stock is deeply undervalued
Centene's fundamentals are clearly solid. Yet the stock has shed 15% of its value so far in 2023. The likely explanation for this sell-off is that potential redeterminations on its Medicaid policies could pressure the company's growth in the near term. This explains why Centene recently lowered its adjusted diluted EPS guidance in 2024 from $7.15 to greater than $6.60. In the long run, however, Medicaid appears poised to continue expanding. And few companies will benefit as much from this trend as the health insurer.
This market sell-off has pushed Centene's forward price-to-earnings (P/E) ratio down to just 9.8. This is well below the healthcare plans industry average forward P/E ratio of 13.3. This lowly valuation explains why analysts have an average 12-month share price target of $88, which represents 30% upside from the current $67 share price. That's what makes Centene stock a strong buy for value investors.
