Here’s Why Cigna Stock Is Undervalued At $215

The stock price of Cigna (NYSE: CI), a health insurance and pharmacy services management company, is up 65% from the levels it was at on March 23, 2020, when broader markets made a bottom due to the spread of Covid-19. This compares with a 74% rise for S&P over the same period, with the resumption of economic activities as lockdowns are gradually lifted and vaccination programs have been initiated in multiple countries. Healthcare stocks have been in focus since the last few months, as with expectations of higher investments into the healthcare system under Biden’s presidency. Healthcare stocks, such as CI, stands to benefit from an increase in healthcare spend, given its exposure to the government sponsored healthcare plans. CI stock is also up only 13% from the levels of $190 seen toward the end of 2018, and it looks undervalued based on its fundamentals as well as valuation multiple, as we discuss below.

Cigna’s total revenue of $160 billion in 2020, reflects 4.5% y-o-y growth, while it was up meaningfully from $49 billion seen in 2018. This can be attributed to the company’s acquisition of  Express Scripts, which was completed in December 2018, expanding the company’s pharmacy management business. Cigna’s net margins remained stable at 5,3% in 2020, compared to 5.4% in 2018. This clubbed with a 3% decline in total shares outstanding due to share buybacks, meant that the company’s earnings grew 2.2x to $23.17 in 2020, compared to $10.69 in 2018, on a per share and GAAP basis. Despite a robust performance over the recent years, CI stock has underperformed the broader markets, and we believe it is likely to see an upside in the near term. Our dashboard, ‘What Factors Drove 13% Change In Cigna’s Stock between 2018 and now?‘, has the underlying numbers.

Cigna’s P/E multiple contracted from 14x in 2018 to 9x in 2020. While the company’s P/E is still at 9x now (based on trailing GAAP EPS), there is a potential upside given the expected growth in EPS over the coming years, as well as comparing the P/E multiple to levels of 14x seen in 2018.

So what’s the likely trigger and timing for upside?

Cigna in 2020 benefited from an increase in Medicaid enrollments, taking its total enrollments to 525,000, reflecting an 18% growth over the 444,000 figure in 2019. As we look into Q4 2020, Cigna has seen a 14% revenue growth, led by higher pharmacy revenue. However, the company saw a decline in adjusted net margins to 3.0% in Q4 2020, compared to 4.4% in the prior year quarter. This can be attributed to an increase in medical expenses, as elective surgeries that were deferred earlier in 2020 are now being attended, and this trend is likely to continue in the near term.

Cigna will likely see an increase in demand for its pharmacy business in the near term, as the Covid-19 crisis winds down. That said, any further recovery in the economy and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia.

Finally, looking at valuation, at the current price of $215, Cigna is trading at 9.6x its estimated adjusted EPS of around $22.29 in 2021, compared to levels of over 12x seen in 2018 and 2019, implying there is more room for growth for CI stock. Even when compared to some of the other healthcare companies, including Humana and Anthem, CI is trading at a lower multiple. The 10x figure for CI based on 2021 EPS, compares with a 18x figure for Humana and 12x for Anthem.