Cigna’s Proposed Acquisition Of Express Scripts Makes Sense If Valuation Multiples Remain Intact

March 15th, 2018 by Trefis Team
CI: Cigna logo
CI
Cigna

Health insurer Cigna (NYSE:CI) recently announced a $52 billion acquisition of pharmacy benefit manager Express Scripts, net of $15 billion in debt, implying a premium of about 30% over the market price prior to the announcement. For this price to be justified, Cigna’s valuation multiple, which has been coming down in recent years, has to remain intact. We have created an interactive dashboard that shows our base price estimate for Express Scripts using a compact valuation calculator, which assumes a flat P/E multiple, and an alternate scenario that assumes continued declines. Which one do you think looks more reasonable? 

Estimates Based On 2018 Expectations

For the purposes of valuation, we estimate that Express Scripts’ revenue for 2018 will total nearly $101 billion compared to $100 billion in 2017. We believe this is a fair estimate given the extremely low growth the company has seen in recent years. However, going by recent trends, we expect the company’s earnings margin to increase from 4.5% in 2017 to 5.1% in 2018, which gives us an EPS forecast of over $9 for 2018. In addition, we assume that the P/E multiple will remain flat. The market could value the ongoing consolidation in the healthcare industry, which can potentially stem the stagnation in Express Scripts’ business, cut costs and improve margins. This would justify a constant, rather than declining, P/E multiple. These assumptions give us a fair price estimate of $88 for Express Scripts, which is not far from the acquisition price. If you disagree with our valuation estimate, you can modify our assumptions and forecasts on our interactive dashboard and come up with an estimate that better incorporates your expectations. With your own price in mind, would you bet for, or against Cigna’s stock after the deal?

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