Should You Buy Cigna Stock Over Its Industry Peer?

We believe Cigna stock (NYSE: CI) is currently a better pick than Molina Healthcare stock (NYSE: MOH), given its better prospects. Both the stocks are trading at a similar valuation, with Cigna’s P/S ratio of 0.5x trailing revenues, compared to 0.6x for Molina stock. However, a higher multiple for Cigna would make sense in our view, given its superior revenue growth and profitability, as discussed below.

If we look at stock returns, Cigna’s 23% rise year-to-date has been much better than the 4% rise for Molina. This compares with a 21% fall in the broader S&P 500 index. Cigna’s outperformance can be attributed to an upward revision on the stock by some of the Wall Street research firms, citing benefits from the Humira biosimilar over the next few years. Also, the company has divested its life, accident, and supplemental benefits business in Asia for $5.4 billion. Cigna plans to use the proceeds on stock repurchases, bolstering its stock price. There is more to the comparison, and in the sections below, we discuss why we believe CI stock will offer better returns than MOH stock in the next three years. We compare a slew of factors such as historical revenue growth, returns, and valuation multiple in an interactive dashboard analysis Cigna vs. Molina Healthcare: Which Stock Is A Better Bet? Parts of the analysis are summarized below.

1. Cigna’s Revenue Growth Has Been Stronger

• Both companies managed to see sales growth over the last twelve months. Still, Molina has witnessed comparatively faster revenue growth of 28.4% vs. 7.6% for Cigna.
• However, if we look at a longer time frame, Cigna has fared better, with its sales rising at an average annual rate of 76.2% to $174.1 billion in 2021, compared to $48.7 billion in 2018, while Molina’s sales grew at an average rate of 15.8% to $27.8 billion in 2021, compared to around $18.9 billion in 2018.
• A strong growth for Cigna can primarily be attributed to its Express Scripts acquisition in Dec 2018.
• Of late, increased drug prices due to higher inflation have aided revenue growth. The company is also seeing a rise in its total medical customer base, bolstering its top-line growth.
• Molina also benefited from the Magellan Complete Care acquisition in 2020. This significantly aided its membership base to 5.2 million in 2021, compared to 3.8 million in 2018.
• Recently, California awarded contracts to Molina as part of the state’s Medicaid program in Los Angeles, Riverside, San Bernardino, Sacramento, and San Diego Counties, with Los Angeles being a heavily populated and important county.
• Molina also received a Medicaid contract in Iowa recently. These wins should bode well for Molina going forward.
• Our Cigna Revenue and Molina Healthcare Revenue dashboards provide more insight into the companies’ sales.
• Looking forward, Cigna’s revenue is expected to grow faster than Molina’s over the next three years. The table below summarizes our revenue expectations for the two companies over the next three years. It points to a CAGR of 16.2% for Cigna, compared to a 1.6% CAGR for Molina, based on Trefis Machine Learning analysis.
• Note that we have different methodologies for companies negatively impacted by Covid and those not impacted or positively impacted by Covid while forecasting future revenues. For companies negatively affected by Covid, we consider the quarterly revenue recovery trajectory to forecast recovery to the pre-Covid revenue run rate. Beyond the recovery point, we apply the average annual growth observed three years before Covid to simulate a return to normal conditions. For companies registering positive revenue growth during Covid, we consider yearly average growth before Covid with a certain weight to growth during Covid and the last twelve months.

2. Cigna Is More Profitable, But It Comes With Higher Risk

• Cigna’s operating margin of 4.5% over the last twelve months is higher than 4.1% for Molina.
• This compares with the 5.4% and 6.7% figures seen in 2019, before the pandemic, respectively.
• Our Cigna Operating Income and Molina Operating Income dashboards have more details.
• Molina’s free cash flow margin of 5.9% is slightly higher than 5.4% for Cigna.
• Looking at financial risk, Molina is much better placed than Cigna. Its 11.5% debt as a percentage of equity is much lower than 37.2% for Cigna, while its 62.7 cash as a percentage of assets is much higher than 3.4% for the latter, implying that Molina has a better debt position and has more cash cushion.

3. The Net of It All

• Cigna has demonstrated better revenue growth and is more profitable. On the other hand, Molina offers lower financial risk.
• Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe Cigna is currently the better choice of the two.
• The table below summarizes our revenue and return expectations for Cigna and Molina over the next three years and points to an expected return of 38% for Cigna over this period vs. a -7% expected return for MOH stock, implying that investors are likely to be better off buying CI stock over MOH, based on Trefis Machine Learning analysis – Cigna vs. Molina Healthcare – which also provides more details on how we arrive at these numbers.

While CI stock looks like a better pick over MOH stock, it is helpful to see how Cigna’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

Furthermore, the Covid-19 crisis has created many pricing discontinuities, which can offer attractive trading opportunities. For example, you’ll be surprised at how counter-intuitive the stock valuation is for UnitedHealth Group vs. Pool Corporation.

Despite higher inflation and the Fed raising interest rates, among other factors, CI stock has risen 23% this year. Can it drop from here? See how low Cigna stock can go by comparing its decline in previous market crashes. Here is a performance summary of all stocks in previous market crashes.

What if you’re looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.

[1] Month-to-date and year-to-date as of 9/23/2022
[2] Cumulative total returns since the end of 2016

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