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Centene (NYSE:CNC ) - a top 5 US Health insurer - announced its Q122 results this week. The company beat street estimates, delivering $37.2bn of revenues - up 24% year-on-year - operating cash flow of $1.2bn, and earnings per share ("EPS") of $1.44, or $1.83 on an adjusted basis - up ~17% year-on-year on average.

Centene also increased its FY22 guidance slightly to adjusted EPS of $5.40 to $5.55, from $5.3 - $5.5, although the results and raise do not seem to have impressed the market - Centene stock is down 9% over the past five days.

Centene does not pay a dividend, but across the past five years, its stock has performed well for investors, rising in value by 116% to its current price of $81. Based on FY22 guidance, the forward price to earnings ratio is ~15x, which is a good score, although GAAP EPS is likely to be significantly lower bearing in mind it was $2.31 in FY21, for a PE ratio of 35x.

Across the past 12 months, Centene stock is +32%, which is about average for the US healthcare sector - compared to rivals such as Anthem (ANTM), +35%, Molina Healthcare (MOH), +29%, United Healthcare (UNH), +30%, CVS Health (CVS), +34%, and significantly better than Humana (HUM), which is -1% across the past 12 months, and Cigna (CI), which is flat.

Centene - whose long-term CEO (since 1996) Michael Niedorff passed away earlier this month, aged 79 - is targeting EPS of $7.5 - $7.75 by 2024, which represents a 39% increase on FY22 guidance, again on an adjusted basis, which at a very basic level implies that its share price ought to have similar growth potential.

Health insurance is a mega-money business, but margins are relatively tight, especially when compared to e.g. the US big pharma sector. Centene's Health Benefit Ratio ("HBR") - the all-important ratio for health insurers (subtract the figure from 100 to get an equivalent net profit margin) was 87.3%, whilst pharmas tend to have net profit margin percentages in the low to mid 20s.

When evaluating Centene as an investment opportunity, it's tempting to look at e.g. Cigna and Humana - Centene's closest rivals in terms of market cap valuation, respectively $82.5bn and $57.5bn, vs. Centene's $50bn, and both dividend payers, and wonder if their lack of share price growth over the past year implies they may enjoy a price surge soon, making them superior opportunities to Centene.

On the other hand, Centene has the momentum, a positive outlook for 2022, and a promise of 40% EPS growth by FY24. In this article I'll consider some other angles - such as exposure to the fast-growing Medicare Advantage ("MA") market, other investment fundamentals, and individual and systemic risks to performance, in order to determine if Centene stock represents good value at this time.

The entire sector has experienced a mild downturn over the past week, but health insurer stocks tend to experience quite severe peaks and troughs in response to national and global events such as e.g. COVID, or changes to healthcare policy at the government level.

As such, although Centene offers reasonable value to new shareholders at its current price, and 30%-40% upside potential in a fair weather market, I believe, investors may find a cheaper entry point in the coming months based on the stocks' traditional volatility. Waiting for a dip on Q222 results may pay off, although for those looking to lock in today's price I'd be reasonably confident about the overall value proposition.

St Louis-based Centene was founded in 1984 and went public in 2001. Since 2012, revenue growth at the company has been astonishing, rising from $7.6bn, to $112.3bn in FY21. By contrast, Humana grew revenues from $39bn, to $84bn in that time, although Cigna's growth is comparable - from $29bn to $174bn.

Centene also benefits from a huge cash position of $28.5bn (as of Q421), although that's not uncommon amongst health insurers - Humana reported cash of $24.9bn as of Q421, and Cigna $36.1bn, whilst Anthem and UnitedHealth reported $53.9bn, and $69bn.

Substantial revenue generation - nearly all of the above mentioned health insurers have a Price to Sales ("P/S") ratio of <1x, and <0.5x in the case of Centene and Cigna - and healthy cash positions does not necessarily translate to high net profit margins however, since insurers essentially earn the spread between the premiums they collect, and the healthcare they pay to administer to policy members as and when required.

According to ValuePenguin, Centene's share of the overall health insurance market is ~10%, behind only UnitedHealth, with 12%, and Anthem, with 11%, although as much as it a numbers game - the industry is subject to intense regulation, oversight, and scrutiny, so eyebrows would likely be raised if any single company began generating disproportionately large profit margins - capitalizing on changes to healthcare policy is often the best way to win in this market.

According to a recent investor day presentation Centene is the No. 1 Medicaid managed care organisation, and the company has 26.5m members overall, which is substantially less than UnitedHealth's 49.5 members, Anthem's 43.5m, but superior to Humana's 16.5m and Cigna's 15.7m, according to Becker's Payer Issues.

Although the Medicaid market has been good to Centene, the current trend is toward Medicare Advantage - plans which offer greater flexibility to members, and add-ons including e.g. dental care - and are more lucrative for health insurers, as I discussed in a recent post on Humana:

Average gross margins that insurers can earn from MA are around $1,600 per member, which is almost double what can be earned in the individual or group markets, so it is easy to see why newcomers are attracted to this market.

According to the Henry J Kaiser Family Foundation ("KFF") Centene's share of the Medicare Advantage market is ~4%, whilst UnitedHealth and Humana are the leaders, with 26% and 18% respectively. Humana has even taken the step of opting to only offer Medicare plans going forward.

Nevertheless, Centene's acquisition of WellCare, in a $17.3bn deal in 2019, has allowed it to begin making progress in MA. Recently, Centene announced that it would consolidate all of its various Medicare offerings under the WellCare brand, and today, ~14% of Centene's business is Medicare, and the company has ~1.2m Medicare Advantage members.

It's interesting to note that Humana's stock took a nosedive in January this year after the company announced a substantial reduction in the number of Medicare Advantage members it expected to add in 2022, to 150k - 200k members, down from 325k - 375k members. That speaks to the increasing competition in the space, with the likes of Oscar Health (OSCR), Bright Health Group (BHG), and Alignment Healthcare (ALHC) all completing lucrative IPOs in the last year or so, targeting MA.

According to KFF, 24.1m people out of 62m Medicare beneficiaries overall are enrolled in Medicare Advantage plans, and that's likely to increase by at least 1m per annum, but the space may be becoming overcrowded, and I personally wonder if at some stage the government may step in and make changes to the scheme administration. If that were to happen, Centene's exposure - significant, but not excessive - may begin to look like the right approach.

Another interesting and high growth area of health insurance is telemedicine, particularly with regard to managing mental health, and Centene has made a decisive move in this market too, acquiring Magellan Health for $2.2bn last year.

According to a press release issued by Centene at the time:

As a result of the transaction, Centene will establish one of the nation's largest behavioral health platforms across 41 million unique members with enhanced capabilities to deliver better health outcomes for complex, high-cost populations.

Magellan Health will also add to Centene's leadership in government sponsored healthcare, bringing 5.5 million new members on government-sponsored plans.

Magellan Health also provides specialty health services for 18 million third-party customer members in addition to Centene's own members. Furthermore, the transaction adds 2 million PBM members and 16 million medical pharmacy members.

Based on the above the deal certainly looks like excellent value for Centene. Much is made of the modern "holistic" approach to healthcare, which attempts to identify and take care of all patient needs, whether it's physical or emotional support, and in many cases, identify problems before they become too serious - good for both insurer and patient.

Medicaid aside, it seems that Magellan will make the most significant contribution to increasing Centene's revenues this year, as shown below.

In relation to the Magellan deal, Centene also notes in its press release that "the sickest 5% of the population consume 50% of healthcare spending," and it seems clear that the company is looking to reduce the costs of managing chronic conditions leveraging modern technology, through e.g. remote consultations, better health monitoring, and connected digital health.

My review of Centene leads me to believe that this is a well managed health insurer that may have been somewhat slow to adapt to new market realities such as MA and telemedicine, but whose exposure to both is arguably about right, given the problems e.g. Humana is experiencing by going all in on MA, as the market begins to crowd, and pure play telemedicine like Teladoc (TDOC) are experiencing in a post pandemic environment.

Centene still earns 67% of its revenues from Medicaid, and 13% from Commercial - markets it knows intimately - but I suspect Medicare, currently 14% of revenues, will grow, and Centene's footprint five years from now will look somewhat different from how it does today.

That's a good thing because companies need to adapt in order to flourish, and it makes me feel confident that management can achieve its goals of increasing EPS by nearly 40% by 2024.

With that said, the loss of its long-term CEO will doubtless be felt by the company and there will inevitably be bumps in the road - Niedorff was one of the most experienced and best paid CEOs in the industry.

It's also a shame that Centene does not pay a dividend, like its rivals. Admittedly Humana, Cigna et al's yields are fairly low, but they still provide a hedge against the sudden share price troughs health insurers are prone to when systemic conditions drives pessimism in the market.

It's all very well driving strong EPS, but if your shareholders are not sharing in that value creation, then it would be understandable if they looked elsewhere - management does mention share buybacks in both its latest earnings call and investor day presentation, but details are scarce and I would not be overly encouraged if I were an investor.

The bottom line is, however, that Centene is a key incumbent in an industry with high barriers to entry where experience counts - witness the astonishing underperformance of the likes of Oscar Health since its IPO. More than anything else, that's what makes Centene a reasonably solid buy and hold, in my view, even if there may be cheaper price points available this year and perhaps next.

The real question as a health insurance investor is which stock to pick, and as I have suggested, Humana's recent issues around membership forecasts has kept its price lower than normal, whereas Centene's is close to its peak.

Nevertheless, given it's better diversified, and has held onto its lucrative Medicaid business, it is probably the more riskless investment, even if its profit margin and PE ratio is somewhat lower.

Frankly, there are worse decisions for investors to have to make than selecting the right top 5 health insurer to back - this is an industry that tends to reward shareholders long-term, although investors should always keep a close eye on regulatory trends.

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I write about Biotech, Pharma and Healthcare stocks and share investment tips. Find me at my marketplace channel, Haggerston BioHealth - model portfolio + 4 exclusive stock tips every week. I'm on twitter @edmundingham

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.