Company Overview: Cigna Corporation (NYSE: CI) is a worldwide health service company, 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

CI Rides on Buyout Synergies & Cost cutting Initiatives: 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 Corporation had completed the acquisition of Express Scripts Holding, 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. In 2018, the company acquired OnePath Life Insurance from ANZ Bank in New Zealand. The move aided the company to expand its set of solutions and capabilities to enhance customer’s value, strengthen its focus on effective capital deployment and drive long-term growth. These acquisition synergies are expected to aid the company’s revenues over the years.

The company had also entered into an agreement to divest its non-health insurance unit Group Life and Disability insurance business to New York Life Insurance company for a sale consideration of $6.3 billion. Cigna Corporation expects to fetch $5.3 billion of net after-tax proceeds in 3QFY20 and intends to utilize the same for share repurchase and repayment of debt in 2020. It is worth mentioning that Cigna Corporation has been extending its membership for the past many quarters and expects a further increase in its membership, going forward. The company’s diversified product portfolio, a broad range of agent network and enhanced service, is likely to drive increased enrollment in the Commercial market segments.

CI remains on track to generate positive cash flow from operations over the past several years, depicting its healthy business operations. In the first six months of 2020, the company’s cash flow from operation stood at ~$5.2 billion, up 22% on pcp.  Steady cash flow generation facilitates the company to invest in its business, pursue strategic mergers and acquisitions and enhance shareholders’ value through dividend payments and share buybacks.

It is worth noting that the company rides on a consistent increase in its revenue base for the last several years. In the first six months of 2020, the company’s revenue went up ~14.4%, owing to the acquisition of Express Scripts. Acquisition synergies, higher operating efficacy, and provision of quality products and services aided the top-line growth. The company projects consolidated adjusted revenues to be in the ambit of $154 million to $156 billion in FY20, depicting a growth of 10-11%. 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 dropped 6.4%). The company’s earnings per share witnesses a CAGR of 17% over the period of 2014 to 2019. Stringent medical care costs and other operating costs implementations helped the company to be profitable.  In the first six months of 2020, the EPS went up by 28% 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)

2QFY20 Key Highlights: During the quarter, the company reported adjusted earnings of $5.81 per share, up from $4.30 per share reported in the year-ago period. The company reported adjusted revenues of $39.2 billion, up ~14.1% year over year, owing to robust fundamental performance and lower medical costs along with solid contributions from each of the company's ongoing businesses. Among the revenue components, pharmacy revenues were $26.6 billion, up 1% year over year, premiums were up 6% on pcp and came in at $10.4 billion. Fees and other revenues decreased 13% to $2.1 billion. The growth in pharmacy revenues was mainly due to the acquisition of Express Scripts. Adjusted EBITDA for the period came in at $3.4 billion, up 28% year over year.

2QFY20 Key Highlights (Source: Company Reports)

Segment-wise Performance: In Health Services, adjusted revenues came in at $28.6 billion as compared to $23.5 billion in the year-ago quarter, driven by insourcing of Integrated Medical pharmacy volumes and robust implementation in specialty pharmacy services. Adjusted revenues from Integrated Medical stood at $9.23 billion as compared to $8.9 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 $1.43 billion, up 3.1% year over year, reflecting continued business growth.

Capital Position: At the end of 30 June 2020, the company reported cash and cash equivalent of $7.2 billion, with long-term debt amounting to $31.8 billion. CI’s debt-to-capitalization ratio stood at 43.5% as on 30 June 2020, as compared to 45.2% as of December 31, 2019. Shareholders’ equity as of 30 June 2020 was $47.4 billion, depicting a rise of 8.1% on pcp. During the quarter, net cash provided by operating activities stood at $3.3 billion, up from ~$1 billion reported in the year-ago quarter. For Year to date through July 29, 2020, CI repurchased 8.3 million of common stock worth $1.5 billion. FY20, the company expects to generate more than $7.5 billion of cash flow from operations, indicating the strong capital efficacy of the company’s business.

Capital Position (Source: Company Reports)

Latest Key Updates:

• On October 1, 2020, the company disclosed its Medicare Advantage (MA) plans for the next year. The company’s MA plans for FY21 will have specific augmented features on the heels of which it intends to endeavor into 67 new counties next year. Through the same plans, the company intends to enter into the markets of five new states in 2021 namely, Ohio, Virginia, Oklahoma, Utah and New Mexico.

• On September 16, 2020, the company unveiled Evernorth to accelerate the distribution of advanced and flexible solutions to address the various requirements of health plans, employers, and government organizations.

• On September 10, 2020, the company stated that it is enhancing offerings with fresher features on the individual exchange, which is also described as the Affordable Care Act (ACA) marketplace.

• On September 2, the company inked a multi-year deal with Dignity Health, which will benefit its customers across California and Nevada to avail reasonably priced healthcare services offered by Dignity Health.

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 46.06% of the total shareholding. T. Rowe Price Associates, Inc. and The Vanguard Group, Inc. hold the maximum interests in the company at 8.49% and 7.91%, respectively.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Key Metrics: During Jun’20, the company’s debt to equity ratio stood at 0.77x, lower than the year ago figure of 0.89x. 

Key Metrics (Source: Refinitiv, Thomson Reuters)

Key Risk Aspects: 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 escalating 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.

Future Expectation: 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 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: Price to Earnings Multiple Based Relative Valuation (Illustrative)

Price to Earnings 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 $176.3 with a market capitalization of ~$64.74 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 19.7% in the past one year. On a technical front, the stock of CI has a support level of ~$158.3 and a resistance level of ~$185.7. 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 2QFY20, resilient business, modest industry outlook and growth prospects, we have valued the stock using P/E multiple based illustrative relative valuation method and arrived at a target price of an upside of lower double-digit (in % terms). For the purpose, we have taken peers like MetLife Inc (NYSE: MET), 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 $176.3, up 3.17% on 7 October 2020.

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

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