A Better Buy: CVS Health Or Cigna?

CVS Health (NYSE:CVS) has gained roughly 17% since the March 23 lows of this year, while Cigna (NYSE:CI) has fared much better and gained 39% over that same period. The health insurance companies have benefited in the current crisis due to lower medical costs and higher enrollments due to an increase in unemployment. The medical costs, though, will increase with a growth in number of elective surgeries performed. Going by fundamentals, we believe Cigna will likely fare better than CVS Health. Specifically, Cigna’s acquisition of Express Scripts makes it a one-stop solution for multiple healthcare needs from pharmacy management to insurance. Also, it will sell its non-health insurance unit – Group Life and Disability insurance business – to New York Life. This sale will likely bring in $5 billion for Cigna, and help reduce its debt. This will likely bode well for the company over the coming years.

Our conclusion is based on our detailed dashboard analysis, ‘CVS Health looks expensive compared to Cigna‘, wherein we compare trends in key metrics for the two industrial companies over the years to determine their relative valuations under the current circumstances. We summarize parts of this analysis below.

Why Has Cigna Outperformed CVS Health Over Recent Weeks?

Cigna’s P/E based on 2019 earnings has declined from 15.2x at the end of 2019 to 13.5x currently, while CVS Health’s multiple has decreased from 14.3x to about 11.9x. While both the companies reported strong earnings growth in Q2 this year, led by a reduction in medical costs, the benefit is limited to a couple of quarters. As and when there is a pickup in elective surgeries, which were deferred earlier due to the spread of coronavirus, medical costs for insurance companies are expected to rise. This has impacted the multiples as well. Also, while the companies will see increased enrollments for health insurance due to higher unemployment, they will lose their corporate plans, which usually offers better margins.

For both Cigna and CVS Health the P/E multiple appears attractive when compared to historical years and comparable to each other. This means both the stocks are attractive from a valuation perspective. However, Cigna has delivered much stronger revenue and earnings growth over the past few years compared to CVS Health. Cigna’s P/E multiple of 13x trailing earnings is much lower than the 23x seen in 2017, and 18x in 2018. CVS Health’s multiple, though, is lower than the levels seen in 2014-2016, it is higher than the levels seen in 2017. Looking at valuation based on forward earnings, both Cigna and CVS Health are trading at under 9x average consensus 2021 earnings. Overall, we believe both Cigna and CVS Health look attractive at the current price, and going by historical performance, Cigna is likely to offer better returns over CVS Health for investors willing to be patient.