Cigna (NYSE:CI) has re-branded its health services line, including the ExpressScripts pharmacy benefit manager it bought last year, as Evernorth. It’s an effort to appear more competitive with United Healthcare (NYSE:UNH), which has long branded its services as Optum. Investors have yet to respond. Cigna stock remains where it was a year ago and there’s no dividend to speak of.
Analysts say Cigna stock is undervalued.
Should you believe them?
A Stellar Quarter
The second quarter report for Cigna was considered stellar. Cigna earned $1.8 billion, $4.73 per share, in the quarter ending in June, on revenue of $39.3 billion. Much of the revenue came from Express Scripts.
After the report came out, analysts began pounding the table for Cigna.
A Trefis analysis compared the stock favorably to CVS Health (NYSE:CVS), which owns Aetna. The report says Cigna benefited from the pandemic due to lower medical costs, with patients delaying non-essential care. Trefis called the stock attractive at $180/share in August. It now trades near $160.
Cigna is next due to report earnings on Oct. 29. The consensus is for $4.24 per share on revenue of $39.14 billion. That would be very close to the June quarter, and could lead to the rush of investment analysts now expect.
Left at the Altar
Cigna’s history, however, leads me to worry about the long term.
In 2015, Cigna tried to merge with rival Anthem (NASDAQ:ANTM) to achieve United Healthcare’s scale. But antitrust officials blocked the deal. The resulting lawsuits were cleared in August with no damages awarded on either side. “Each party must bear the losses it suffered as a result of their star-crossed venture,” wrote Delaware judge J. Travis Lasker.
Instead of getting a merger of equals, Cigna spent $54 billion on Express Scripts. Express Scripts needed that merger after United Healthcare bought rival Catamaran for $12.8 billion, moving its own prescription business to it.
The result is Evernorth, which also includes Cigna’s specialty pharmacy, Accredo, along with computer services for customers and employees. Tim Wentworth, who had been running Express Scripts, will run the new unit.
While United Healthcare has walked away from the marketplaces created by the Affordable Care Act, Cigna has gone into more of them for 2021. That sounds great, except the Trump administration is trying to declare the act unconstitutional. In Georgia, the Republican governor has sought a waiver denying Georgians access to the marketplace.
Without access to the Affordable Care Act markets, it’s hard for me to see where Cigna’s growth is coming from. Pharmacy benefit managers like Express Scripts are being tied closely to insurers, which is why Express Scripts took Cigna’s offer.
The Bottom Line on Cigna Stock
It’s hard to go against experienced analysts. Cigna looks like a buy here.
How long it will remain a buy, however, is unclear. Killing the Affordable Care Act would also knock out a lot of customers. Killing it with no replacement could easily lead Democrats to pass a Medicare-for-all plan leaving companies like Cigna in the cold.
I also question Cigna’s long-term competitive position against United Healthcare, and even against CVS, whose drug stores and clinics can deliver care for less. There’s also the specter of Berkshire Hathaway (NYSE:BRK.A), Amazon.Com (NASDAQ:AMZN) and JPMorgan Chase (NYSE:JPM) expanding Haven Health beyond their own employees.
But what do I know?
At the time of publication, Dana Blankenhorn held long positions in AMZN.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn.