Company Overview: Cigna Corporation (NYSE: CI) is a worldwide health service company, which is involved in enhancing the safety, health, well-being, and mental condition of its customers. The company offers cost-effective, predictable, and access to quality care through its unified capabilities and connected, personalized solutions to its clients and customers. The company has the following reportable segments namely, Integrated Medical, Health Services, International Markets and Group Disability and Other. 

CI Details

Synergies from Acquisition & Cost cutting Initiatives are Key catalysts: Cigna Corporation (NYSE: CI) was incorporated from the merger between Connecticut General Life Insurance Company (CG) and Insurance Company of North America (INA).  Based on its vast and differentiated business profile, along with a robust balance sheet and strong operating efficacy, the company remains on track to keep its 2020 earnings guidance intact amid COVID-19 outbreak. Let us devolve deeper and put lights on the company’s growth strategies. Cigna had completed the acquisition of Express Scripts Holding, one of the largest pharmacy benefit manager, for a consideration of $67 billion. The deal marked a further transformation in the healthcare landscape, strengthening CI’s competitive position. The merged company will aid consumers by bridging the gap between medical care and pharmacy benefits, lowering costs, and improving overall treatments. The company expects the buyout to boost earnings to the range of $20-$21 per share in 2021, up from the prior outlook of $18 per share.

Recently, the company expanded its partnership with Oscar, to launch Cigna + Oscar, distinctive consumer-first health insurance for small businesses. Markedly, in today’s time, greater than 50% of small businesses are still undecided of altering their health insurer while heading into 2021. This introduction will allow companies to select from a broad range of inexpensive and simple health treatments as and when required. The company also partnered with Priority Health, the second largest health plan in the state of Michigan. The expanded partnership will enable Cigna’s clients to access the broad network of health care providers and high-quality specialists of Priority Health in Michigan. Further, the company also added Talkspace to its quickly growing virtual provider network. The move strengthens the company’s foothold in its virtual care services offerings amid the ongoing COVID-19 pandemic.

It is worth noting that, the company rides on a consistent increase in its revenue base for the last several years. In 1QFY20, the company’s revenues went up ~15%, owing to the acquisition of Express Scripts. Acquisition synergies, higher operating efficacy, and provision of quality products and services aided the top-line growth. Cigna projects consolidated adjusted revenues to be in the ambit of $154 million to $156 billion in FY20. Along with top-line growth, the company also remained profitable, by maintaining a robust bottom-line growth. This can be apparent from a year over year growth in the company’s annual earnings since 2009 (2016 being an exceptional year, where earnings per share declined 6.4%). Stringent medical care costs and other operating costs implementations helped the company to be profitable. In 1QFY20, the company’s bottom-line increased by 20% year over year. For FY20, the company expects adjusted income from operations to be between $6.8 billion to $7 billion (or $18 to $18.60 per share). For 2021, the company expects EPS to be between $20 to $21. 

Key Trends (Source: Company Reports) 

1QFY20 Key Highlights: During the quarter, the company reported adjusted earnings of $4.69 per share, up from $3.9 per share reported in the year-ago period. The company reported adjusted revenues of $38.4 billion, up 15% year over year, owing to the acquisition of Express Scripts. Among the revenue components, pharmacy revenues were $25.1 billion, almost flat year over year, premiums were up 9% on pcp and came in at $10.8 billion. Fees and other revenues decreased 11% to $2.2 billion. The growth in pharmacy revenues was mainly due to the acquisition of Express Scripts. Adjusted EBITDA for the period came in at $2.8 billion, up 10% year over year. 

1QFY20 Key Highlights (Source: Company Reports) 

Segment-wise Performance: In Health Services, adjusted revenues came in at $27.2 billion as compared to $22.5 billion in the year-ago quarter, driven by growth in adjusted pharmacy script volumes. Adjusted revenues from Integrated Medical stood at $9.9 billion as compared to $9.2 billion reported in the year-ago period, driven by an increase in Commercial customers as well as premium growth. Adjusted revenues from International Markets stood at $1.5 billion, up 5% year over year, reflecting continued business growth. 

Capital Position: At the end of 31 March 2020, the company reported cash and cash equivalent of $4.5 billion, with long-term debt amounting to $32.1 billion. Cigna’s debt-to-capitalization ratio stood at 44.7% as on 31 March 2020, as compared to 45.2% as of December 31, 2019. Shareholders’ equity as of 31 March 2020 was $45.1 billion. During the quarter, net cash provided by operating activities stood at $1.9 billion, down from $3.2 billion reported in the year-ago quarter.

Cash Flow Highlights (Source: Company Reports) 

Business Streamlining:  In 2019, the company stated that it inked a deal with New York Life, America’s largest mutual life insurer, to divest its non-health insurance unit, Group Life and Disability insurance business for a sale consideration of $6.3 billion.  The deal is likely to realize ~$5.3 billion of net after-tax proceeds from this transaction and is expected to conclude in 3QFY20. The divestments of its unit will aid Cigna to lower its debt level, which increased post the acquisition of Express Scripts Holding. Notably, the proceed collected from the sale will be used for buying back shares. To conclude, the divestment will have no material impact on the company’s FY20 earnings but will add marginally to FY21 earnings. 

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 45.59% of the total shareholding. The Vanguard Group, Inc. and T. Rowe Price Associates, Inc. hold the maximum interests in the company at 8.02% and 7.97%, respectively. 

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters) 

Key Metrics: During Mar’20, the company’s debt to equity ratio stood at 0.81x, lower than the year ago figure of 0.95x.   

Key Metrics (Source: Refinitiv, Thomson Reuters) 

Risk Analysis: On the flip side, the company is exposed to short-term disruptions hindering from challenging macro-economic environment due to COVID-19 led outbreak. The company had disclosed that the rising unemployment scenario is causing erosion among its commercial customers, both in the Integrated Medical business and Health Service business, as well as weighing on its Group Disability business. Further, the company has a debt-laden balance sheet, which might adversely impact its future growth opportunities. Also, the company is exposed to risks related to foreign operations that are required to be addressed from time to time. The company also faces stiff competition from peers. 

Outlook: For FY20, the company expects earnings to be in the range of $18-$18.6 per share.  Consolidated adjusted revenue is expected in the ambit of $154-$156 billion.  The projection reflects the negative impact of COVID-19, which will be offset by the company’s business growth. The company remains on track to grow in the near future based on its diversified business, and synergies from Express Scripts acquisition. The company’s cost cutting initiatives will position it well to weather the continuing tough business environment, which stemmed from the coronavirus outbreak. Moreover, the company continues to expect solid volume growth this year in Pharmacy Services, Specialty Pharmacy Care and Medicare Advantage alongside expense efficiencies. 

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters) 

Valuation Methodology 1: Price to Earnings Multiple Based Relative Valuation (Illustrative) 

Price to Earnings Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters) 

Valuation Methodology 2: P/CF Multiple Based Relative Valuation (Illustrative)

P/CF Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months 

Stock Recommendation: The stock of CI closed at $180.08 with a market capitalization of ~$66.4 billion. The stock made a 52-week low and high of $118.5 and $224.64, respectively. The stock of the company went up by 2.75% in the past three months. The company is making higher investments in virtual healthcare to remain ahead of the industry amid COVID-19-induced remote monitoring of health conditions. Considering the robust results for 1QFY20, resilient business, modest industry outlook and growth prospects, we have valued the stock using P/E and P/CF multiples based illustrative relative valuation methods and arrived at a target price of an upside of lower double-digit (in % terms). For the purpose, we have taken peers like UnitedHealth Group Inc (NYSE: UNH), Anthem Inc (NYSE: ANTM), Humana Inc (NYSE: HUM), to name few. Hence, we recommend a “Buy” rating on the stock at the closing price of $180.08, down 1.08% on 8 July 2020.  

CI Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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