Should you buy this blue-chip, market-beating stock?

A common saying is that you only need a few big winners to get rich as an investor because a 10 bag investment more than makes up for several small losers.

To call Medicare centene (CNC -0.10%) a big winner almost seems like an understatement: an investment of $10,000 in the stock 10 years ago would now be worth about $94,000, which equates to a compound annual growth rate of about 25.1%. For context, a $10,000 investment in the S&P500 the index would have reached about $35,000 with dividends reinvested. This equates to a total annual rate of return of 13.5%.

But is Centene still a buy for growth investors? Let’s take a look at its fundamentals and valuation to find out.

A booming business

When Centene shared financial results for its second quarter (which ended June 30) late last month, the company continued on its winning streak.

The health insurer reported a 15.8% year-over-year increase in total revenue to $35.9 billion in the quarter. The figure is slightly higher than analysts’ average revenue forecast of $35.6 billion for the second quarter. How did Centene beat analyst earnings consensus for the ninth of the past 10 quarters?

The company’s total membership grew 7.2% year-over-year to 26.4 million at the end of the second quarter. This was driven by strong growth in Centene’s Medicare and Medicaid businesses and the acquisition of managed healthcare company Magellan Health. In addition to a higher membership base, Centene collected higher bonuses from its customers than a year ago. This explains how the company’s revenue grew at a double-digit pace in the quarter.

Centene posted $1.77 of non-GAAP diluted earnings per share (EPS) (adjusted) in the second quarter, representing a staggering 41.6% year-over-year growth rate. That figure was significantly higher than analysts’ average adjusted diluted EPS forecast of $1.59. And that marked the fifth quarter of the last 10 in which the company beat analysts’ forecasts.

In addition to Centene’s higher revenue base, its non-GAAP net margin increased 50 basis points year over year to 2.9% in the quarter. The company’s improved profitability was only partially offset by a tiny increase in the number of shares outstanding, from 582.8 million a year ago to 583.6 million in the second quarter.

Centene’s earnings growth is expected to remain strong for the foreseeable future. Growing demand for health insurance and complementary acquisitions is why analysts estimate Centene’s adjusted diluted EPS to reach 12.3% annually over the next five years.

Image source: Getty Images.

The company is financially healthy

Centene’s business is booming. But even then, it’s still a good idea to also look at a company’s balance sheet. Indeed, if a company hits a rough patch, its financial health could be the difference between life and death, the proverbial bankruptcy.

Centene had a net debt balance of $3.5 billion as of June 30, a manageable burden on the company given its size. This is supported by the fact that the company’s earnings before interest, taxes, depreciation and amortization (EBITDA) were nearly $2 billion in the first half of 2022.

An investment-friendly valuation

Centene appears to be an exceptional company, but the stock remains reasonably valued at the current share price.

Centene’s forward price-to-earnings (P/E) ratio of 15.3 is just below the healthcare plan industry average forward P/E ratio of 16.9. The company’s annual earnings growth potential is 12.3%, which is essentially in line with the industry average of 12.6%. This arguably means the company is a little undervalued for its fundamentals, making it a buy for investors looking for double-digit annual total returns that beat inflation over the long term.

Kody Kester has no position in the stocks mentioned. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.

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