Centene is a healthcare plan provider that is trading at an exceptional value. The stock is trading near $73, with the potential for it to exceed $150 over the next couple of years. That’s more than 100% upside.
It’s a good value because it is trading at one of the lowest price/earnings ratios in the last five years. The current reading is 14.8. The P/E is often 20 or higher and traded as high as a P/E of 71.7 in 2022.
Purchasing at a P/E near or below 15 over the last half decade has been a good entry point. The forward P/E is 9.6.
In addition to the low P/E, the company is also expected to grow. Analysts project 11.7% yearly EPS growth over the next five years. That is higher than the median growth estimate of 9.3% for S&P 500 stocks.
Cory Mitchell, an analyst with Trading.biz, said, “A good value doesn’t mean much if a company isn’t growing, because the stock can appear to be a good value as the share price continues to decline.
“A good deal on a company that is growing its earnings is a much more attractive proposition. Growing earnings and being undervalued are both pulling the price higher.
“This is the case with Centene (CNC). Rising earnings will help increase the stock price over time. And the stock is trading at a lower valuation than it typically trades at. Returning to a more common valuation will also help increase the stock price. This stock could easily reach $150 over the next couple of years.”
Here are additional fundamental criteria that indicate this stock may be a great value right now:
- The company is buying back shares, with a current buyback yield of 4.1%. Repurchasing shares, especially when the shares are trading at a good value helps bolster shareholder value since profits are split between fewer shareholders.
- Sales have increased an average of 18.7% per year over the last half-decade.
- Earnings have increased 14.3% per year over the last five years.
Analysts project the company will earn $7.60 per share in 2025. Multiplied by a P/E of 20, which is a conservative estimate of where P/E could return to, provides a target of $152. That’s 108% above the April 3 closing price of $73.04.
The stock price has been moving higher since September of 2023. Purchasing the stock near $73 provides an entry point near the lows of a rising channel. That doesn’t mean the stock can’t drop further, but it does appear to be a good entry point based on the technical and fundamental outlook of the stock.
This is an investment that could take multiple years to reach the profit target. Define your risk limit and your exit point, for both if the stock rises or falls. While the company is growing and undervalued based on historic metrics, it is not guaranteed to rise. The idea is to hold the trade as long as the fundamentals remain strong. If earnings or estimates drop, that will lower the profit projection, and an increase in earnings or estimates would raise the projection.
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