Cigna: One Of The Best Blue-Chip…

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Hunting for value doesn’t have to involve hours of sifting through obscure names that no one has ever heard of. Oftentimes, value can be found hiding in plain sight even among blue-chip companies. The time to buy these names is when uncertainty is high, while the long-term growth thesis is intact.

Such I find the case to be with Cigna (CI), which is again trading in bargain territory after the recent drop. In this article, I highlight why CI may be a good pick for potentially strong returns, so let’s get started.

CI: One Of The Best Blue Chip Bargains For February

Cigna is one of the largest global health insurance companies, with presence in over 30 countries, and 190 million customer and patient relationships. It also has massive scale and coverage, contracting with 99% of U.S. pharmacies. Cigna also greatly expanded its presence in the growing pharmacy benefits management space, giving it more negotiating leverage with pharmacies on drug pricing.

Cigna just reported a strong Q4 2021, with adjusted revenue growing by a robust 9.6% YoY, to $45.7B, beating the analyst forecast of $44B. Adjusted EPS is also up, growing to $4.77 in Q4 comparing favorably to $3.51 in the prior year period. This also beat the sell side analysts’ consensus estimate of $4.71. Importantly, CI ended 2021 on a high note, with adjusted EPS growing by 11% YoY to $20.47 for the full year.

These results were driven by CI’s strong organic pharmacy customer base growth of 8.4M to 107.3M members at the end of 2021, and the medical customer base grew by 431K customers to 17.1M. Plus, Evernorth (CI’s PBM segment) fulfilled 424M pharmacy scripts during the fourth quarter, an increase of 9% YoY.

It’s worth noting that the business is seeing some headwinds in the form of a higher medical care ratio of 87.0% the latest quarter, which is 220 bps higher than the 84.8% in Q4 of 2020. The higher MCR ratio is reflective of higher medical costs, including net unfavorable COVID-19 related impacts, and the pricing impact of the repeal of the health insurance industry tax.

Looking forward, COVID-19 costs may still present a challenging early Q1’21, given the high rate of infection, but they should ameliorate as the current quarter progresses, given the steep decline in COVID rates in recent weeks. In addition, CI is becoming a more efficient operator, with SG&A expense ratio falling by 120 bps YoY to 7.3%, and this could help to offset some of the headwinds from higher medical utilization rates.

CI is also well-positioned to ride the wave of new specialty drugs and gene therapies as they come online. This is due in part to CI’s vertically integrated model that includes its Evernorth PBM segment. Management highlighted this position in the recent conference call:

New drugs represent one of the most promising areas for medical innovation in the coming years. And we’re seeing good dramatic growth in specialty pharmaceuticals, gene therapies and vaccines. These potentially life-saving and life-changing advances also bring intensifying pressures on affordability. This creates significant opportunity for Evernorth to provide customers, patients and clients with the most innovative new therapies in ways that are accessible, affordable and predictable.

By 2025, for example, 66 biologic drugs currently in the market will have the patents expire, opening the door for increased biosimilar competition and an increasing opportunity to decrease healthcare spending by an estimated $100 billion. Importantly, this trend is already unfolding in 2022 and will accelerate further in 2023. We are positioned to lead and fully intend to capture a large portion of those savings for the benefit of our customers, patients and clients by combining and coordinating capabilities that include our Accredo capability, which provides differentiated specialty pharmacy care for a number of specific conditions.

I’d also highlight that today specialty pharmacy already drives only 1/3 of our Evernorth revenue, and Accredo is one of the fastest-growing parts of our health service portfolio. Additionally, leveraging Express Scripts, which draws upon its expertise in delivering improved affordability, leveraging a broad network, supply chain expertise as well as clinical and service capabilities.

Meanwhile, Cigna maintains a strong A- rated balance sheet and management remains shareholder friendly. This is reflected by the 35.2M shares of common stock repurchased last year for $7.7 billion. Year to date through February 2, 2022, the company has repurchased another 2.5M shares for $580M. As such, it appears that management is committed to reducing its share count since issuing shares as part of its stock and cash purchase of Express Scripts in 2018.

I’m also encouraged by the recent 12% dividend bump. At present, CI yields 2% and the dividend is well-covered with a payout ratio of just 22%, based on 2021 EPS of $20.47. I see value in CI at the current price of $221 with a 9.7, sitting well below its normal PE of 13.0 over the past decade. In addition, sell side analysts expect a respectable 10% EPS growth next year (average of next 4 quarters’ estimates).

CI stock: Price correlated with fundamentals

CI Valuation (FAST Graphs)

Sell side analysts have a consensus Buy rating with an average price target of $259, implying a potential one-year 19% total return. In addition, Seeking Alpha’s Quant has a Strong Buy rating with A+ scores for growth and profitability, and a B+ for valuation as shown below.

CI Stock: Quant rating and factor grades

CI Quant Rating (Seeking Alpha)

Investor Takeaway

Cigna is a well-run health insurance provider with a robust PBM arm. It’s seeing top and bottom-line growth, and management has been aggressive with share repurchases along with increasing the dividend.

Looking forward, CI has a strong growth runway through its Evernorth segment with the expectation of specialty drugs and gene therapies coming online in over the next few years. Meanwhile, CI trades rather cheaply with respect to its historical valuation and forward growth estimates. As such, CI appears to be a blue-chip bargain.


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