Cigna Corporation Stock Is Trading at a Steep Discount

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Ahead of Cigna Corporation (NYSE:CI) buying Express Scripts Holding Company (NASDAQ:ESRX), the latter’s quarterly earnings results suggest that the consolidation of the health plan providers will reward shareholders of CI stock.

In the first quarter, Express Scripts reported net income growing 14.1% to $623.2 million. EPS rose to $1.10 a share as cash flow from operations increased 51.1% year-over-year to $1.511 billion.

For 2018, the company did not change its cash flow from operations or its revenue forecast. But it did expect non-GAAP EPS to fall in the range of $9.00-$9.14, down from $9.27-$9.47. CI stock investors will care about these results since Express Scripts’ combination with Cigna will close by the end of this year.

The Rationale of Express-Cigna Deal

The $52-billion deal to buy Express Scripts makes plenty of sense. Cigna has a proven growth strategy, which hinges on better drug affordability, expanding customer choice, and broadening the reach of distribution. This will result in CI growing its market share as it signs on more customers in more markets.

In its first quarter, the company boosted revenue by 9%, to $11.4 billion. EPS rose $1 billion to $4.11 a share. Despite CI stock dropping by almost 23% from its peak, it’s probably in the fair-value range at 16 times earnings. The forward P/E of 12 times could be overstated, should Cigna find more cost synergies while growing revenue in the low double digits.

For now, value investors should still assume earnings growing at around 10-11%. It will need one to two quarters before the combined Cigna-Express Scripts operates at a higher ROE (return on equity).

Growth Factors

Cigna will very likely build on its strong revenue growth in the Commercial Employer Business. The unit’s positive momentum lifted revenue in the Global Health Care unit by 10% in the first quarter. If investors think of the overall gap between the customer and Cigna’s service offering, they will realize that Cigna could grow by tending to customer needs.

This is accomplished in two ways. First, health care costs are growing at an unsustainable rate, but now that this inflation problem is under government scrutiny, affordability could improve. The more customers have access to affordable care, the more revenue Cigna takes in.

Customer adherence to treatment is the second area that, if addressed, would increase Cigna’s growth. Very often, customers do not follow the treatment plan. So by acting as the central manager to coordinate the medical, pharmacy and behavioral care, customers get the right treatment they need. Cigna becomes the place with the good reputation of offering that quality of care from end to end.

Cigna’s acquisition of Express Scripts fits in this model by increasing the financial flexibility of the bigger firm. The integrated offering, while opening to more geographic markets, widens the company’s addressable market.

Cigna alone has $16.2 million global medical customers, which grew by 327,000 in 2018. The global health care operating expense ratio of 22.7% is a good starting point for Cigna this year but could drop after Express Scripts is rolled into the business.

Cigna’s Outlook

For 2018, Cigna forecasts revenue growing between 7-8% from 2017. EPS will be in the range of $12.85-$13.25, or up in the range of 23%-27% from last year. In combination with Express Scripts, Cigna forecasts 2021 earnings in the range of $20-$21 a share, up a solid $2-$3 a share from its previous forecast.

The debt levels coming from the acquisition may concern investors, but the free cash flow of at least $6 billion by 2021 will be more than enough to lower Cigna’s debt-to-capitalization ratio to the 30-times range 18 to 24 months after the deal closes.

Valuation for CI Stock

CI stock is up only 10% from its March lows. Unfortunately, the stock’s valuation could stay below its fair value of $248.53 until the deal closes. Conversely, the Wall Street average price target, based on 17 analysts, is $216.41 (based on three finbox.io models), which is still above the recent share price of $176.

For value investors, patience is everything. Buying CI stock at these levels lets shareholders participate in the consolidation and reshaping of the health care plan sector.

Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get actionable insight to achieve strong investment returns.

Disclosure: As of the time of writing, Chris did not own shares in any of the companies mentioned.


Article printed from InvestorPlace Media, https://investorplace.com/2018/05/cigna-stock-is-trading-at-a-steep-discount/.

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