Summary
Cigna has a strong track record of growth and profitability, and Evernorth shows promise.
It maintains a strong balance sheet and pays a well-covered dividend that’s set for growth.
It’s set for robust capital returns over the next 4 years and is trading in deep value territory.
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Vertigo3d/E+ via Getty Images (This idea was first shared with Marketplace readers of Hoya Capital Income Builder on 11/13/2021)
Value investing is sometimes misunderstood as requiring one to sift through a stack of obscure names that no one has heard of. In reality, it’s much simpler than that, as I often see companies that are household names that trade in value territory, with some being in deep value territory.
Buying such stock when they are trading in a valley can lead outsized long-term gains, and this is exemplified by the successful investor, Joel Greenblatt’s mantra of “buying above average companies at below-average prices.”
This brings me to Cigna Corporation (NYSE: CI ), which, despite its recent bounce, still appears to be deep value hiding in plain sight. In this article, I highlight what makes Cigna a Strong Buy for value and income, so let’s get started. Prepare For Takeoff
Cigna is one of the largest global health insurance companies, with presence in over 30 countries, and 190M customer and patient relationships. It also has massive scale and coverage in the pharmacy space, contracting with 99% of U.S. pharmacies. Cigna also greatly expanded its presence in the growing PBM (pharmacy benefits manager) space, giving it more negotiating leverage with pharmacies on drug pricing.
Cigna has a proven track record of delivering shareholder returns. This is exemplified by its strong bottom-line growth through a number of macro-healthcare and company-specific events over the past decade. As seen below, CI has demonstrated an impressive 15% adjusted EPS CAGR since 2010, and this includes the enactment of the Affordable Care Act, launch of public exchanges, the mega acquisition of Express Scripts, and the COVID-19 pandemic. (Source: Investor Presentation )
CI also maintains strong margins. As seen below, CI’s net income margin of 4.9% ranks second compared to its direct peer group of UnitedHealth Group (NYSE: UNH ), Anthem (NYSE: ANTM ), and Humana (NYSE: HUM ). (Source: YCharts)
CI’s growth trend continued in the third quarter, with revenue growing by 8% YoY to $44.3B . This was driven by double-digit (12.6%) YoY growth in CI’s Evernorth (PBM unit), followed by 9% and 10% YoY revenue growth in CI’s U.S. Medical and International Markets.
It’s worth noting that CI’s medical care ratio ticked up by 180 bps YoY, to 84.4% as healthcare utilization by members increased. I don’t see this as being an area of concern, however, as many patients postponed elective surgeries and doctor’s office visits last year, and the MCR ratio actually sequentially, from 85.4% in the second quarter. Encouragingly, CI has benefited from the repeal of the health insurance industry tax, as this, combined with continued expense efficiency, dropped CI’s SG&A expense ratio by 110 bps to 7.0% for the third quarter.
Looking forward, I see reasons to be optimistic around the Evernorth business, as it recently retained and expanded its relationship with the Department of Defense TRICARE pharmacy program with a renewed 7-year contract, serving 10M active-duty service members, retirees, and their families.
In addition, CI could see a big market opportunity through its expansion of Evernorth’s MDLIVE capabilities, which provides primary, urgent, behavioral, and dermatology care through a virtual platform. Morningstar also sees a growth runway for CI’s government and Evernorth’s PBM businesses, as reflected by its latest analyst report: “Beyond those cost-control efforts, Cigna is pursuing several growth channels. Naturally, Cigna’s new bulked-up service offerings should allow it to cross-sell PBM services into its managed-care client set and vice versa, opening up new profit streams with existing clientele. Cigna has highlighted its Accredo specialty pharmacy, which has particular relevance in oncology and rare-disease therapies, and its eviCore medical benefit management as key cross-selling opportunities in addition to its medical insurance and PBM offerings. The company also continues to expand geographically, especially in government and international markets. Cigna has highlighted a disciplined expansion strategy in the U.S. government channel with a focus on areas where it already has a significant commercial book of business to serve patients as they retire from existing employer clients and age into Medicare Advantage offerings. We view this type of geographic expansion as supportive of […]
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