Cigna Stock Looks Attractive At $180

Despite a 36% rise since the March 23 lows of this year, at the current price of around $177 per share, we believe Cigna’s stock (NYSE: CI), a health insurance and pharmacy services management company, looks attractive and it could offer significant upside from the current levels. CI stock has moved from $130 to $177 off the recent bottom compared to the S&P which moved 55%, with the resumption of economic activities as lockdowns are gradually lifted. CI stock has partially recovered to the levels it was at before the drop in February due to the coronavirus outbreak becoming a pandemic. Furthermore, CI stock is also down 13% from levels seen in early 2018.

Much of the 13% decline of the last 2 years can be attributed to a 46% decline in the P/E multiple. Looking at fundamentals, Cigna’s revenues grew 3.6x, from $42 billion in 2017 to $154 billion in 2019, while its earnings (non-GAAP) grew from $10.46 to $17.05 on a per share basis, as a 34% decline in net income margin and 49% growth in total shares outstanding offset some of the earnings growth. This strong performance can primarily be attributed to the Express Scripts acquisition, which was completed in December 2018. However, the company’s P/E multiple has contracted. We believe the stock is likely to see more upside despite the recent uptick and the potential weakness from a recession driven by the Covid outbreak. Our dashboard, ‘What Factors Drove -13% Change in Cigna Stock between 2017 and now?‘, has the underlying numbers.

Cigna’s P/E multiple changed from 19x in 2017 to 12x in 2019. While the company ‘s P/E is 10x now, there is a potential upside when the current P/E is compared to levels seen in the past years, P/E of 19x at the end of 2017 and 12x as recently as late 2019.

So what’s the likely trigger and timing for further upside?

The global spread of coronavirus has meant there just aren’t many people visiting doctors for non-emergency cases, and several types of elective surgeries are being postponed, resulting in lower medical costs for health insurance companies, such as Cigna. This translated into its MBR ratio (medical costs as % of premium revenue) declining from 77% in the prior year quarter to 68% in Q2 2020. This also aided the company’s earnings, which grew 28% to $4.73 per share on an adjusted basis, compared to $3.70 in the prior year quarter. It should be noted that this is a temporary benefit to the company. As economies open up and there is an increase in elective surgeries, the MBR ratio will also increase. In fact, given the backlog of deferred surgeries, the medical costs for the company could stay high for a few quarters.

The Express Scripts acquisition of $67 billion was a big move for Cigna, as it is now able to offer multiple healthcare needs from pharmacy services to insurance. The company will likely see steady growth in revenues for both segments. Furthermore, the company has decided to restructure its businesses, and it will sell its non-health insurance unit – Group Life and Disability insurance business  – to New York Life. This sale will likely bring in $5 billion for Cigna, and help reduce its debt, which has grown significantly from $5.5 billion in 2017 to $37.4 billon in 2019, due to the Express Script acquisition.

Overall, we believe that Cigna will likely see steady revenue and earnings growth over the coming years, and the stock trading at just 10x its trailing earnings, and under 10x its 2020 expected earnings appears to be an attractive level for investors wiling to invest for the long-term.

Looking at the broader economy, over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to buoy market expectations. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of a sustained uptick in new cases could spook investors once again.