TipRanks Smart Value #1: Misdiagnosed Value
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Dear Investors,
Dear Investors,
Welcome to the first edition of our brand new TipRanks Smart Value Newsletter!
In each Newsletter, we aim to highlight an undervalued stock poised for long-term gains. Each week, our analysts will identify an overlooked opportunity – a company with strong fundamentals and a resilient business model, whose stock is trading below its intrinsic value.
Our selections will cover all economic sectors, as true Value can be found everywhere – and we will help you find it. Stocks we recommend will have been carefully analyzed and vetted using TipRanks’ data, ensuring you receive well-researched, high-quality opportunities aimed at delivering substantial, long-term value. We will present you with a comprehensive analysis that outlines our selection process, giving you clear insights into why each stock stands out as a top value opportunity.
With that in mind, let’s dive into this week’s top pick and explore why it could be a valuable addition to your Value portfolio.
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This Week’s Top Value Pick: Centene Corp. (CNC)
Centene Corp. (CNC) is a healthcare enterprise specializing in government-sponsored health programs, including Medicaid, Medicare, and the Health Insurance Marketplace. The company’s services encompass managed care, specialty health solutions, and pharmacy benefits management. As of December 31, 2024, Centene’s Medicaid enrollment stood at 13 million members, making it the largest Medicaid managed care organization in the United States.
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From Humble Beginnings to Industry Leadership
Founded in 1984 as a nonprofit Medicaid plan in Wisconsin, Centene has grown into one of the largest managed care providers in the U.S. Over the decades, the company expanded its footprint through strategic acquisitions and organic growth, capitalizing on government-sponsored healthcare programs.
The 2000s marked a period of rapid expansion as Centene entered new state Medicaid markets and diversified its services. The passage of the Affordable Care Act in 2010 unlocked further opportunities, enabling the company to enter the Health Insurance Marketplace and Medicare Advantage programs, significantly boosting enrollment and revenue. The 2016 acquisition of Health Net strengthened CNC’s presence in California and added military healthcare contracts.
In 2020, Centene merged with WellCare Health Plans, creating a leading healthcare enterprise serving more than 24 million members nationwide. This significantly expanded Centene’s Medicare and Medicaid offerings and solidified its position in government-sponsored healthcare programs.
Entering the 2020s, Centene shifted its focus toward operational efficiency, divesting non-core businesses and optimizing costs. In 2022, the company streamlined its operations by selling its international assets and pharmacy benefit management unit to focus on U.S.-based government-sponsored healthcare programs. As part of this strategy, Centene divested its behavioral health holding, Magellan Health, in 2023, and completed the sale of Circle Health Group, a U.K.-based healthcare provider, in January 2024.
Throughout 2024, Centene has expanded its Health Insurance Marketplace and Medicare Prescription Drug Plan (PDP) memberships. These developments reflect CNC’s continued efforts to refine its portfolio and strengthen its position in government-sponsored healthcare programs within the United States.
Today, with a market capitalization of over $30 billion and annual revenues exceeding $163 billion, Centene is ranked #22 on the Fortune 500 list.
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A Scalable and Diversified Business Model
Centene operates a diversified managed care business, primarily serving government-sponsored healthcare programs across four segments: Medicaid, Medicare, Commercial, and Other. The company generates revenue through insurance premiums, government contracts, and healthcare services, with Medicaid and Medicare Advantage being its primary income drivers.
In FY24, Medicaid accounted for approximately 58% of Centene’s total premium and service revenues, contributing $83.9 billion. The Commercial segment, including the Health Insurance Marketplace, accounted for 24% of premium and service revenues, totaling $34.9 billion.
Centene’s business model is built on scale and cost management. Operating under a capitated payment system, the company receives fixed monthly payments from government agencies to provide healthcare coverage. This structure ensures predictable cash flow and improves visibility into future costs and revenues. It also incentivizes cost efficiency by emphasizing preventive care and network management, helping to reduce unnecessary expenses while ensuring members receive appropriate care.
As of December 31, 2024, the company had 28.6 million members enrolled across various healthcare programs, including 13 million Medicaid members. Notably, its Medicaid contracts in Florida and New York each contributed over 10% of its total Medicaid premium revenue for the year. Additionally, Centene’s presence in the Health Insurance Marketplace positions it to benefit from increased enrollment and regulatory support for affordable healthcare.
Looking ahead, demographic trends, increased Medicaid eligibility, and an aging population driving Medicare enrollment are expected to further bolster the company’s long-term financial outlook.
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Solid Financial Position Signals Opportunity
Centene has delivered impressive growth over the past five years, with revenues and earnings increasing at a CAGR of 15.8% and 15%, respectively. In the fiscal fourth quarter, the company’s adjusted diluted EPS soared 78% year-over-year to $0.80, surpassing analysts’ expectations of $0.49 per share. Meanwhile, revenue grew 3% to $40.8 billion, exceeding estimates of $39.4 billion.
Centene’s health benefit ratio (HBR)—which reflects the percentage of premium revenue spent on medical care—stood at 89.6% in Q4, slightly up from 89.5% in the prior year. For the full year, the HBR was 88.3%, compared to 87.7% in FY23. This ratio was in line with the company’s prior guidance. A higher HBR generally signals operational efficiency, as it indicates more premium dollars are directed toward patient care rather than administrative costs.
For FY24, the company reported adjusted earnings of $7.17 per share, up 7.3% year-over-year, while revenue climbed 5.9% to $163.1 billion. Encouraged by its strong performance, Centene raised its FY25 premium and service revenue guidance by $4 billion, now expecting revenues between $158 and $160 billion. It also reaffirmed its adjusted EPS outlook of more than $7.25 for the year.
The company consistently delivers strong earnings and free cash flow (FCF), supported by disciplined cost control and strategic divestitures of non-core assets. Centene’s negative FCF of $490 million in 2024 was a one-off event, which was due to temporary timing shifts in pharmacy rebates, state reimbursements, and risk adjustment payables. The company’s core business remains solid, and cash flow should recover in 2025.
Financially, Centene maintains a solid position. While its debt-to-equity ratio of 0.7x is slightly above the industry median of 0.69x, its interest coverage ratio of 4.5x suggests earnings comfortably cover interest expenses. Additionally, major credit rating agencies hold a stable outlook on the company, with Fitch assigning a “BBB” rating and S&P Global a “BBB-,” reflecting investment-grade status. These ratings indicate that Centene is considered investment grade, reflecting adequate capacity to meet financial commitments.
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Share Buybacks Signal Value
Centene does not currently pay dividends and has not publicly indicated any plans to initiate dividend payments. However, the company remains committed to returning capital to shareholders through its robust share repurchase program. In December 2023, Centene’s Board of Directors authorized a $4 billion expansion to its existing stock repurchase plan, supplementing the $1.2 billion that remained under the previous authorization.
Demonstrating its dedication to shareholder value, Centene repurchased 14.4 million shares for $930 million in Q4 2024, bringing its total buybacks for the year to $3 billion. Currently, the company has $2.2 billion available for additional repurchases under the program.
Despite these buybacks, CNC shares have lost 23.8% over the past year, along with most Medicaid providers, as the sector faced widespread challenges. The resumption of Medicaid eligibility redeterminations led to significant membership losses, while rising medical costs and inadequate reimbursement rate adjustments further pressured margins, contributing to stock declines across the industry. However, in 2025, Centene expects Medicaid enrollment to stabilize post-redeterminations and plans to drive operational efficiencies, which could help support its stock performance.
As a result of the share price decline, CNC is now trading at a considerable discount to its industry peers and the median healthcare sector’s price-to-earnings ratio. Additionally, based on discounted cash flow models, CNC appears to be undervalued by approximately 74%, positioning it as a compelling investment opportunity.
Wall Street analysts remain positive on Centene, with the stock’s average price target implying a 28.8% upside over the next 12 months. Notably, the most optimistic target suggests an even greater potential gain of 56.5% within the same period, reinforcing investor confidence in the company’s long-term growth prospects.
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Investing Takeaway
Centene’s leadership in Medicaid, combined with its focus on operational efficiency and strategic portfolio adjustments, positions it well for long-term growth in the managed healthcare sector. While recent stock declines have left Centene trading at a discount relative to peers, its stable earnings, scalable business model, and disciplined cost management provide a strong foundation for share-price recovery. Additionally, favorable demographic trends and the continued expansion of government-sponsored healthcare programs support its growth trajectory. For investors seeking exposure to healthcare, Centene offers a mix of stability and long-term upside.
