Thematic evaluation
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The Cigna Group (CI)

October 07, 2024

Compared to: CVS Health Corp. (CVS) | UnitedHealth Group, Inc. (UNH) | Health Care Select Sector SPDR Fund (XLV)

Our reasoning

Cigna appears moderately undervalued based on its strong financial performance, market position, and growth prospects. The company's P/E ratio and EV/Sales are below industry averages, suggesting undervaluation, while its high EV/EBITDA ratio is likely influenced by debt levels. The potential for successful integration of pharmacy and medical capabilities, along with expansion in specialty pharmacy, provides significant upside potential that may not be fully reflected in the current valuation.

Key takeaways
  • Cigna's strong financial performance, driven by its core pharmacy and medical insurance businesses, is offset by declining profitability due to higher medical costs and strategic investments.
  • The company's focus on expanding its specialty pharmacy and care services businesses is driving revenue growth, but it is also increasing operating expenses.
  • Cigna has a strong liquidity position and efficient asset utilization, but its increasing debt-to-equity ratio could indicate potential concerns about financial stability.
  • The company's strong free cash flow generation will support debt repayment capacity, dividend growth potential, and investment in organic growth opportunities.
  • Cigna's ability to navigate industry challenges and capitalize on growth opportunities will depend on its ability to execute its strategic initiatives effectively while managing operational, financial, and legal/regulatory risks.
Undervalued
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Evaluation summary

  1. Company Overview:

    • The Cigna Group is a global health services company with a diversified business model focused on pharmacy benefits management (PBM), specialty pharmacy, and medical insurance.
    • Cigna operates through two main segments: Evernorth Health Services, which provides pharmacy benefits, specialty pharmacy, and care delivery/management solutions, and Cigna Healthcare, which provides comprehensive medical and coordinated solutions.
    • The company's target market includes employers, governmental organizations, unions, associations, and individuals in the U.S. and select international markets.
    • Cigna's key competitors include other large managed care organizations, pharmacy benefit managers, and health care providers.
    • For comparative analysis, we will be using UnitedHealth Group, Inc. (UNH) and CVS Health Corp. (CVS) as industry peers and the Health Care Select Sector SPDR Fund (XLV) as a benchmark.

  2. Financial Performance:

    • Cigna's revenue has been consistently increasing, driven by growth in its core pharmacy and medical insurance businesses.
    • The company's profitability has been declining in recent quarters, impacted by factors such as higher medical costs, strategic investments, and the impairment of the VillageMD equity investment.
    • Cigna's profitability ratios remain significantly higher than the industry average, indicating that the company is still more profitable than its peers.
    • Cigna's return on average assets (ROA) and return on average total equity (ROE) are significantly higher than the industry average, indicating efficient asset utilization.
    • Compared to its peers, CI has generally outperformed UNH and CVS over the past three years, with higher annualized returns. However, CI's stock price has been more volatile than UNH and CVS, with higher volatility and larger drawdowns.

  3. Operational Efficiency:

    • Cigna has a strong liquidity position, with a current ratio of 0.83, which is slightly below the industry average.
    • Cigna's debt-to-equity ratio of 77.16 is slightly higher than the industry average, indicating a higher level of financial leverage.
    • Cigna's cash flow from operations has been increasing, indicating strong cash flow generation from core business operations.
    • The company's net investing cash flow has been decreasing, suggesting a decline in investments in long-term assets.
    • Cigna's net financing cash flow has been increasing, indicating a shift towards financing activities.
    • Cigna's strong free cash flow generation will support debt repayment capacity, dividend growth potential, and investment in organic growth opportunities.
    • Cigna's free cash flow margin has been consistently above the industry average, indicating efficient cash flow management.
    • Cigna's capital expenditure has been relatively stable, while depreciation trends have been consistent, suggesting a balanced approach to asset management.
    • Cigna's dividend payments have been consistent, and the company has a history of share repurchases, indicating a commitment to shareholder returns.
    • Compared to its peers, CI's Sharpe ratio has been lower than UNH's and CVS's in recent quarters, suggesting that CI's risk-adjusted returns have been lower than the peer companies.

  4. Growth Opportunities:

    • Cigna is expanding its market reach through strategic acquisitions, such as the acquisition of a minority interest in CarepathRx Health Systems Solutions to expand specialty pharmacy and care management capabilities.
    • The company is investing in R&D to develop new products and services, including the launch of its interchangeable biosimilar for Humira.
    • Cigna is expanding its geographic reach through its International Health operating segment.
    • The company's strategic focus on integrating its pharmacy and medical capabilities through the Evernorth and Cigna Healthcare segments creates opportunities for cross-selling and operational efficiencies.
    • Cigna's capital allocation strategy prioritizes technology investments, dividends, strategic acquisitions, and share repurchases.
    • The company's management team has a history of successfully executing strategic plans, as evidenced by the company's consistent revenue growth and profitability.

  5. Risks and Threats:

    • Cigna faces intense competition, pricing pressures, and regulatory risks that could impact profitability.
    • The company's ability to execute its strategic initiatives effectively, particularly in the area of care delivery and management solutions, is a key risk factor.
    • The planned sale of the Medicare Advantage and related businesses could result in a near-term financial impact.
    • Cigna is exposed to political, legal, operational, regulatory, and economic risks from global operations.
    • Cybersecurity threats and data privacy/security compliance are significant risks for the company.

  6. Valuation Analysis:

    • Cigna's valuation metrics, such as P/E and EV/EBITDA, are generally in line with its peers, suggesting that the company is fairly valued.
    • The company's strong free cash flow generation and growth potential could support a higher valuation in the future.
    • Potential catalysts for Cigna's stock price include continued revenue growth, improved profitability, and successful execution of strategic initiatives.

  7. Price Performance:

    • CI has exhibited a mixed performance history compared to XLV. While CI has outperformed XLV over longer periods (3 years and 1 year), it has underperformed in shorter periods (6 months and 2 years).
    • CI has shown higher annualized returns than XLV over the 3-year period, but lower returns over the 2-year period.
    • CI's annualized volatility has been consistently higher than XLV's, suggesting that CI is a riskier investment.
    • XLV has consistently offered a better risk-adjusted return than CI, as evidenced by its higher Sharpe ratio.
    • CI's price performance has been more volatile than UNH and CVS, with higher volatility and larger drawdowns.

  8. Future Outlook:

    • Cigna's revenue growth is expected to continue, driven by its core businesses and strategic initiatives.
    • The company's profitability is expected to improve as it manages medical costs and realizes the benefits of its strategic investments.
    • Cigna's strong free cash flow generation will support debt repayment capacity, dividend growth potential, and investment in organic growth opportunities.
    • The company's ability to navigate industry challenges and capitalize on growth opportunities will depend on its ability to execute its strategic initiatives effectively while managing operational, financial, and legal/regulatory risks.
    • Analyst estimates for Cigna's future earnings are generally positive, suggesting that the market expects the company to continue to grow.

  9. Summary:

    • Cigna is a well-established global health services company with a diversified business model, strong financial performance, and a track record of successful strategic execution.
    • The company's growth opportunities are driven by its focus on specialty pharmacy, care services, and integrated solutions.
    • Cigna faces significant risks, including intense competition, pricing pressures, and regulatory risks.
    • The company's valuation is generally in line with its peers, but its strong free cash flow generation and growth potential could support a higher valuation in the future.
    • Cigna's price performance has been more volatile than its peers and the benchmark, but the company's strong fundamentals and growth prospects suggest that it could outperform in the long term.
    • Overall, Cigna appears to be a high-growth, high-risk investment with potential for significant returns. Investors should carefully consider the company's risks and opportunities before making any investment decisions.
Peer fundamentals 
Fundamentals
Insights
  • Cigna's revenue growth is driven by its core pharmacy and medical insurance businesses, but profitability is being pressured by higher medical costs and strategic investments.
  • The company's focus on expanding its specialty pharmacy and care services businesses is driving revenue growth, but it is also increasing operating expenses.
  • Cigna has a strong liquidity position and efficient asset utilization, but its increasing debt-to-equity ratio could indicate potential concerns about financial stability.
  • The company's strong free cash flow generation will support debt repayment capacity, dividend growth potential, and investment in organic growth opportunities.
  • Cigna's ability to navigate industry challenges and capitalize on growth opportunities will depend on its ability to execute its strategic initiatives effectively while managing operational, financial, and legal/regulatory risks.
Analysis
  • Revenue - Cigna's revenue has been consistently increasing, driven by growth in its core pharmacy and medical insurance businesses. - The company's strategic focus on integrating its pharmacy and medical capabilities through the Evernorth and Cigna Healthcare segments is creating opportunities for cross-selling and operational efficiencies. - Recent investments in VillageMD and CarepathRx demonstrate Cigna's efforts to expand its care delivery and management solutions, though the VillageMD impairment highlights execution risks.
    • Profitability
      • Cigna's profitability has been declining in recent quarters, impacted by factors such as higher medical costs, strategic investments, and the impairment of the VillageMD equity investment.
      • The company's focus on expanding its specialty pharmacy and care services businesses is driving revenue growth, but it is also increasing operating expenses.
      • Despite the decline in profitability, Cigna's profitability ratios remain significantly higher than the industry average, indicating that the company is still more profitable than its peers.
    • Liquidity
      • Cigna has a strong liquidity position, with a current ratio of 0.83, which is slightly below the industry average.
      • This indicates that the company has sufficient liquid assets to cover its short-term obligations.
    • Solvency
      • Cigna's debt-to-equity ratio of 77.16 is slightly higher than the industry average, indicating a higher level of financial leverage.
      • This suggests that the company is taking on more debt to finance its operations and growth initiatives.
      • However, Cigna's strong cash flow generation and stable free cash flow margin suggest that the company is able to manage its debt obligations effectively.
    • Operational Efficiency
      • Cigna's return on average assets and return on average total equity are significantly higher than the industry average, indicating efficient asset utilization.
      • This suggests that the company is effectively using its assets to generate revenue and profits.
    • Cash Flow Analysis
      • Cigna's cash flow from operations has been increasing, indicating strong cash flow generation from core business operations.
      • The company's net investing cash flow has been decreasing, suggesting a decline in investments in long-term assets.
      • Cigna's net financing cash flow has been increasing, indicating a shift towards financing activities.
      • The company's strong free cash flow generation will support debt repayment capacity, dividend growth potential, and investment in organic growth opportunities.
    • Risk Factors
      • Cigna faces intense competition, pricing pressures, and regulatory risks that could impact profitability.
      • The company's ability to execute its strategic initiatives effectively, particularly in the area of care delivery and management solutions, is a key risk factor.
      • The planned sale of the Medicare Advantage and related businesses could result in a near-term financial impact.
    • Future Outlook
      • Cigna's revenue growth is expected to continue, driven by its core businesses and strategic initiatives.
      • The company's profitability is expected to improve as it manages medical costs and realizes the benefits of its strategic investments.
      • Cigna's strong free cash flow generation will support debt repayment capacity, dividend growth potential, and investment in organic growth opportunities.
      • The company's ability to navigate industry challenges and capitalize on growth opportunities will depend on its ability to execute its strategic initiatives effectively while managing operational, financial, and legal/regulatory risks.
Most recent earnings report
Financial statements 
All public filings
Comparative Analysis
Benchmarks (as of 2024-10-04)
Health Care Select Sector SPDR Fund (XLV)
  • Performance Comparison: CI has exhibited a mixed performance history compared to XLV. While CI has outperformed XLV over longer periods (3 years and 1 year), it has underperformed in shorter periods (6 months and 2 years). This suggests that CI's performance is not consistently better than XLV's.
  • Risk and Return Analysis: CI has shown higher annualized returns than XLV over the 3-year period, but lower returns over the 2-year period. This indicates that CI's returns are not consistently higher than XLV's. However, CI's annualized volatility has been consistently higher than XLV's, suggesting that CI is a riskier investment. This is further supported by CI's larger maximum drawdown compared to XLV.
  • Risk-Adjusted Performance: XLV has consistently offered a better risk-adjusted return than CI, as evidenced by its higher Sharpe ratio. This suggests that XLV has been more efficient in generating returns relative to its risk.
  • Overall Assessment: CI has shown potential for higher returns, but its higher volatility and larger drawdowns make it a riskier investment than XLV. XLV's consistent performance, lower volatility, and better risk-adjusted returns make it a more attractive investment option for investors seeking a balanced approach. While CI's higher returns over the 3-year period are noteworthy, its inconsistent performance and higher risk profile should be carefully considered before making any investment decisions.
Peers Price History(as of 2024-10-04)
CVS Health Corp. (CVS)UnitedHealth Group, Inc. (UNH)
  • Performance Comparison:
    • CI has generally outperformed UNH and CVS over the past three years, with particularly strong performance in the 3-year period. However, CI's performance has been more volatile than UNH and CVS, with periods of both outperformance and underperformance.
  • Risk and Return Analysis:
    • CI has provided higher annualized returns than UNH and CVS over the past three years. However, CI's annualized volatility has also been higher than UNH and CVS, suggesting that CI's stock price has been more sensitive to market fluctuations.
    • CI's maximum drawdown of 28.18% is higher than UNH's 16.91% but lower than CVS's 48.23%. This indicates that CI's stock price has been more volatile than UNH but less volatile than CVS.
  • Risk-Adjusted Performance:
    • CI's Sharpe ratio has been lower than UNH's and CVS's in recent quarters, suggesting that CI's risk-adjusted returns have been lower than the peer companies.
    • CI's beta values suggest that it is less volatile than the overall market, but it has been more volatile than UNH in recent quarters.
  • Overall Assessment:
    • CI has generally outperformed UNH and CVS over the past three years, with higher annualized returns. However, CI's stock price has been more volatile than UNH and CVS, with higher volatility and larger drawdowns. This suggests that CI's stock price has been more sensitive to market fluctuations.
    • CI's Sharpe ratio has been lower than UNH's and CVS's in recent quarters, suggesting that CI's risk-adjusted returns have been lower than the peer companies.
    • CI's beta values suggest that it is less volatile than the overall market, but it has been more volatile than UNH in recent quarters.
    • Overall, CI appears to be a higher-growth, higher-risk investment than UNH and CVS. Investors seeking higher returns may be willing to accept the higher volatility and risk associated with CI. However, investors seeking a more stable investment may prefer UNH or CVS.
Peers Fundamentals(as of 2024-06-30)
CVS Health Corp. (CVS)UnitedHealth Group, Inc. (UNH)
  1. Market Position and Size:
    • The Cigna Group (CI) is a smaller player in the managed healthcare industry compared to its larger competitors, UnitedHealth Group, Inc. (UNH) and CVS Health Corp. (CVS). CI's market capitalization of 102494.0 is less than UNH's 557911.0 by 455417.0 and greater than CVS's 74598.2 by 27895.8.
    • CI's market cap is significantly smaller than UNH's, which is the largest company in the industry. However, CI is larger than CVS, which is the smallest of the three companies.
  2. Profitability and Efficiency:
    • CI's profitability metrics are generally lower than its peers and industry averages. CI's Gross Profit Margin is 14.75%, which is significantly lower than the industry average of 41.24%. CI's EBITDA Margin is 4.8%, which is also lower than the industry average of 9.02%. CI's Net Profit Margin is 2.56%, which is higher than CVS's 1.94% but lower than UNH's 4.26% and the industry average of -4.1%.
    • CI's return on assets, equity, and capital are generally lower than its peers and industry averages. CI's Return on Average Assets is 2.51%, which is lower than UNH's 4.98% and CVS's 2.86% but higher than the industry average of -2.05%. CI's Return on Average Total Equity is 8.55%, which is lower than UNH's 16.43% and CVS's 9.74% but higher than the industry average of -20.51%. CI's Return on Average Total Capital is 10.06%, which is lower than UNH's 14.28% but higher than CVS's 8.5% and the industry average of -0.46%. CI's Return On Average Invested Capital is 5.11%, which is lower than UNH's 9.57% but higher than CVS's 4.73% and the industry average of -17.6%.
  3. Financial Health and Stability:
    • CI's liquidity and solvency metrics are generally in line with its peers and industry averages. CI's Current Ratio is 0.83, which is slightly lower than UNH's 0.88 and CVS's 0.86 but lower than the industry average of 1.29. CI's Quick Ratio is 0.66, which is lower than the industry average of 1.8. CI's Total Debt to Total Equity Ratio is 77.16, which is lower than UNH's 84.04 and CVS's 111.87 but higher than the industry average of 70.96. CI's Debt / EBITDA is 3.71, which is lower than the industry average of 105.64.
    • CI's liquidity and debt position are generally in line with its peers and industry averages, despite its smaller size. This suggests that CI has a reasonable level of liquidity and is not overly leveraged.
  4. Valuation and Market Perception:
    • CI's valuation metrics are generally lower than its peers and industry averages. CI's Enterprise Value To Sales is 0.58, which is lower than UNH's 1.45 and CVS's 0.39 but higher than the industry average of 0.8. CI's Enterprise Value To EBITDA is 6.96, which is significantly lower than the industry average of 276.91. CI's Price To Earnings is 28.84, which is lower than UNH's 39.95 but higher than CVS's 10.55 and the industry average of 21.65. CI's Price to Book Ratio is 2.48, which is lower than UNH's 6.23 but higher than CVS's 0.99 and the industry average of 3.37. CI's Price To Sales Ratio is 0.48, which is lower than UNH's 1.45 but higher than CVS's 0.21 and the industry average of 0.57.
    • CI's valuation is generally lower than its peers and industry averages, despite its smaller size. This suggests that the market may be valuing CI at a discount to its peers, potentially due to its lower profitability and efficiency.
  5. Cash Flow and Capital Management:
    • CI's cash flow metrics are generally lower than its peers, considering their market caps. CI's Net Operating Cash Flow is 265.0, which is significantly lower than UNH's 6746.0 and CVS's 3089.0. CI's Total Capital Expenditure is 370.0, which is lower than UNH's 853.0 and CVS's 638.0. CI's Free Cash Flow is -105.0, which is significantly lower than UNH's 5893.0 and CVS's 2451.0.
    • CI's cash flow generation strength is lower than its peers, considering their market caps. This suggests that CI may be facing challenges in generating sufficient cash flow to support its growth and operations.
  6. Growth and Future Prospects:
    • CI's growth metrics show a mixed picture compared to its peers. CI's sales revenue has shown consistently higher growth than the peer group average over the past 5 years, with a 5-year CAGR of 16.08% compared to the peer average of 12.06%. However, CI's net income, basic earnings per share, free cash flow, and free cash flow margin have shown consistently lower growth than the peer group average over the past 5 years.
    • CI's growth rates have shown significant year-to-year fluctuations, particularly in net income, basic earnings per share, free cash flow, and free cash flow margin. This suggests that CI's growth may be volatile and subject to external factors.
    • CI's 5-year CAGR for sales revenue is significantly higher than its 3-year CAGR, indicating an acceleration in sales growth. However, CI's 5-year CAGRs for net income, basic earnings per share, free cash flow, and free cash flow margin are lower than their respective 3-year CAGRs, indicating a deceleration in these metrics.
    • CI's growth is concentrated in sales revenue, while other key metrics like net income, earnings per share, and free cash flow have shown slower growth. This suggests that CI may be facing challenges in translating revenue growth into profitability and cash flow generation.
    • CI's growth profile is characterized by strong sales revenue growth but weaker profitability and cash flow growth. This suggests that CI may be facing challenges in controlling costs or generating sufficient cash flow to support its growth.
  7. Potential for Investment:
    • CI's investment attractiveness is mixed. While CI has shown strong sales revenue growth, its lower profitability, weaker cash flow generation, and lower valuation compared to its peers raise concerns about its ability to sustain this growth and generate shareholder value. Investors may want to consider CI's growth potential against its profitability and cash flow challenges before making an investment decision.
  8. Key Risks and Considerations:
    • CI's lower profitability and cash flow generation compared to its peers raise concerns about its ability to sustain its growth and compete effectively in the long term.
    • CI's lower valuation compared to its peers suggests that the market may be valuing CI at a discount to its peers, potentially due to its lower profitability and efficiency.
    • CI's growth rates have shown significant year-to-year fluctuations, suggesting that CI's growth may be volatile and subject to external factors.
  9. Overall Assessment:
    • CI is a smaller player in the managed healthcare industry with strong sales revenue growth but lower profitability and cash flow generation compared to its peers. CI's valuation is also lower than its peers, suggesting that the market may be valuing CI at a discount. While CI's growth potential is promising, its profitability and cash flow challenges raise concerns about its ability to sustain this growth and generate shareholder value. Investors may want to carefully consider these factors before making an investment decision.