Earnings

Dissecting the Numbers for Centene Corporation (CNC) and Humana Inc. (HUM)

Centene Corporation (NYSE:CNC) shares are up more than 76.48% this year and recently decreased -1.89% or -$1.88 to settle at $97.85. Humana Inc. (NYSE:HUM), on the other hand, is up 24.17% year to date as of 12/05/2017. It currently trades at $250.05 and has returned 3.73% during the past week.

Centene Corporation (NYSE:CNC) and Humana Inc. (NYSE:HUM) are the two most active stocks in the Health Care Plans industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.

Growth

Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect CNC to grow earnings at a 13.03% annual rate over the next 5 years. Comparatively, HUM is expected to grow at a 11.87% annual rate. All else equal, CNC’s higher growth rate would imply a greater potential for capital appreciation.



Profitability and Returns

A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this., compared to an EBITDA margin of 6.98% for Humana Inc. (HUM). CNC’s ROI is 6.30% while HUM has a ROI of 5.40%. The interpretation is that CNC’s business generates a higher return on investment than HUM’s.

Cash Flow 




The amount of free cash flow available to investors is ultimately what determines the value of a stock. CNC’s free cash flow (“FCF”) per share for the trailing twelve months was -0.13. Comparatively, HUM’s free cash flow per share was +18.31. On a percent-of-sales basis, CNC’s free cash flow was -0.06% while HUM converted 4.81% of its revenues into cash flow. This means that, for a given level of sales, HUM is able to generate more free cash flow for investors.

Financial Risk

CNC’s debt-to-equity ratio is 0.71 versus a D/E of 0.45 for HUM. CNC is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

CNC trades at a forward P/E of 18.01, a P/B of 2.59, and a P/S of 0.35, compared to a forward P/E of 20.88, a P/B of 3.26, and a P/S of 0.68 for HUM. CNC is the cheaper of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. CNC is currently priced at a -9.15% to its one-year price target of 107.71. Comparatively, HUM is -5.75% relative to its price target of 265.31. This suggests that CNC is the better investment over the next year.

The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.00 for CNC and 2.00 for HUM, which implies that analysts are equally bullish on their outlook for the two stocks.

Risk and Volatility

Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. CNC has a beta of 0.69 and HUM’s beta is 0.85. CNC’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. CNC has a short ratio of 2.56 compared to a short interest of 3.01 for HUM. This implies that the market is currently less bearish on the outlook for CNC.

Summary

Centene Corporation (NYSE:CNC) beats Humana Inc. (NYSE:HUM) on a total of 9 of the 14 factors compared between the two stocks. CNC is growing fastly, generates a higher return on investment and higher liquidity. In terms of valuation, CNC is the cheaper of the two stocks on an earnings, book value and sales basis, CNC is more undervalued relative to its price target. Finally, CNC has better sentiment signals based on short interest.

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