Cigna stock earnings: one of the best blue-chip deals (NYSE: CI)

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Value hunting doesn’t necessarily involve hours of sifting through obscure names no one has ever heard of. Oftentimes, value lurks in plain sight, even among blue chip companies. The time to buy these names is when uncertainty is high, while the long-term growth thesis is intact.

I find this to be the case with Cigna (CI), which is once again trading in bargain territory after the recent decline. In this article, I outline why CI can be a good choice for potentially strong returns, so let’s get started.

CI: One of the Best Prime Deals for February

Cigna is one of the largest health insurance companies in the world, with a presence in more than 30 countries and 190 million customer and patient relationships. It also has massive scale and coverage, contracting with 99% of US pharmacies. Cigna has also significantly expanded its presence in the growing pharmacy benefit management space, giving it more bargaining power with pharmacies on drug pricing.

Cigna just reported a strong fourth quarter of 2021, with solid adjusted revenue growth of 9.6% year-over-year to $45.7 billion, beating analyst forecasts of $44 billion. Adjusted EPS was also up, rising to $4.77 in the fourth quarter from $3.51 in the prior year period. It also topped the sell-side analyst consensus estimate of $4.71. Importantly, CI ended 2021 on a high note, with adjusted EPS growing 11% year-over-year to $20.47 for the full year.

These results were driven by the strong organic growth of CI’s pharmaceutical customer base from 8.4 million to 107.3 million members at the end of 2021, and the medical customer base increased by 431,000 customers to reach 17, 1 million. Additionally, Evernorth (CI’s PBM segment) executed 424 million pharma scripts during the fourth quarter, a 9% year-over-year increase.

It should be noted that the company is experiencing headwinds in the form of a higher medical care ratio of 87.0% in the last quarter, 220 basis points higher than the 84.8% in the fourth quarter of 2020. The higher MCR ratio reflects higher medical costs. , including the net unfavorable impacts related to COVID-19, and the impact on prices of the repeal of the tax on the health insurance sector.

Going forward, COVID-19 costs may still present a difficult start to the quarter, given the high infection rate, but should improve as the current quarter progresses, given the sharp decline COVID rates in recent weeks. Additionally, CI is becoming a more efficient operator, with the SG&A expense ratio down 120 basis points year-over-year to 7.3%, which could help offset some of the headwinds from medical utilization rates. higher.

CI is also well positioned to ride the wave of new specialty drugs and gene therapies as they come online. This is in part due to CI’s vertical integration model which includes its Evernorth PBM segment. Management emphasized this position during the recent conference call:

New drugs represent one of the most promising areas for medical innovation in the years to come. And we’re seeing spectacular good growth in specialty pharmaceuticals, gene therapies and vaccines. These potentially life-saving and life-changing advances are also putting increasing pressures on affordability. This creates a significant opportunity for Evernorth to provide clients, patients and clients with the most innovative new therapies in an accessible, affordable and predictable way.

By 2025, for example, 66 biologic drugs currently on the market will see their patents expire, opening the door to increased competition from biosimilars and a growing opportunity to reduce healthcare costs by an estimated $100 billion. Importantly, this trend is already unfolding in 2022 and will accelerate further in 2023. We are well positioned to lead and fully intend to capture a large portion of these savings for the benefit of our customers, patients and clients. by combining and coordinating capabilities that include our Accredo Capability, which provides differentiated specialty pharmaceutical care for a number of specific conditions.

I would also like to point out that today, specialty pharmacy already generates only 1/3 of our revenue from Evernorth, and Accredo is one of the fastest growing parts of our healthcare services portfolio. Additionally, leverage Express Scripts, which leverages its expertise to provide better accessibility, by leveraging extensive network, supply chain expertise as well as clinical and service capabilities.

Meanwhile, Cigna maintains a strong A-rated balance sheet and management remains supportive of shareholders. This is reflected in the 35.2 million common shares repurchased last year for $7.7 billion. Year-to-date through Feb. 2, 2022, the company repurchased an additional 2.5 million shares for $580 million. As such, it appears management has been committed to reducing its share count since issuing shares as part of its stock and cash purchase of Express Scripts in 2018.

I am also encouraged by the recent 12% increase in the dividend. Currently, CI is earning 2% and the dividend is well covered with a payout ratio of just 22%, based on 2021 EPS of $20.47. I see value in CI at the current price of $221 with a 9.7, well below its normal PE of 13.0 over the past decade. Additionally, sell-side analysts expect a respectable 10% EPS growth next year (average of next 4 quarter estimates).

CI stock: Price correlated to fundamentals

CI valuation (FAST charts)

Analysts on the sell side have a consensus Buy rating with an average price target of $259, implying a potential total return of 19% YTD. Additionally, Seeking Alpha’s Quant has a Strong Buy rating with A+ scores for growth and profitability, and a B+ for valuation, as shown below.

CI stock: quantitative rating and factor ratings

CI Quant Rating (Seeking Alpha)

Key takeaway for investors

Cigna is a well-run health insurance provider with a robust PBM arm. It is seeing growth in revenue and earnings, and management has been aggressive with share buybacks while increasing the dividend.

Looking ahead, CI is seeing strong growth through its Evernorth segment with the expectation that specialty drugs and gene therapies will come online over the next few years. Meanwhile, CI is trading rather low relative to its historical valuation and future growth estimates. As such, CI seems like a good deal.

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