The past six months have been a windfall for Centene’s shareholders. The company’s stock price has jumped 52.4%, hitting $43.66 per share. This performance may have investors wondering how to approach the situation.
Is there a buying opportunity in Centene, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Is Centene Not Exciting?
Despite the momentum, we're sitting this one out for now. Here are three reasons we avoid CNC and a stock we'd rather own.
1. Customer Base Hits a Plateau
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.
Over the last two years, Centene’s total customers were flat, coming in at 27.63 million in the latest quarter. This performance was underwhelming and shows the company faced challenges in landing new contracts. It also suggests there may be increasing competition or market saturation. 
2. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for Centene, its EPS declined by 16.3% annually over the last five years while its revenue grew by 11.9%. This tells us the company became less profitable on a per-share basis as it expanded.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. 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 isn’t one of our picks. Following the recent rally, the stock trades at 14.7× forward P/E (or $43.66 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're pretty confident there are superior stocks to buy right now. We’d suggest looking at one of our all-time favorite software stocks.
Stocks We Would Buy Instead of Centene
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