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Cigna is Rebounding: Should Investors Get on Board?

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Following the news on July 11 that the Trump administration dropped their proposal to eliminate rebates for drug manufacturers and pharmacy benefit managers (PBM), Cigna Corp (CI) surged 9%. The company’s profits would have taken a major hit had the ban gone into effect. While the stock is down 6% year-to-date, analysts believe a rebound is coming.

With its August 1 earnings release date quickly approaching, we enlisted the help of TipRanks to find out if Cigna really is on the road to recovery.

Cigna Relies on PBM Segment

Cigna is a health insurance company based in Philadelphia, Pennsylvania offering a wide variety of medical, supplemental, dental and Medicare plans.

The proposed rule would have prevented drug makers from giving discounts and rebates to insurers or PBMs for putting a particular drug on a list of drugs covered by health plans.

PBMs were first used to help insurance companies manage prescription claims for patients with Medicare Part D plans. Now they are responsible for drug utilization review, formulary management, determining which pharmacies are in network as well as reimbursements given to pharmacies.

Had the President been able to ban drug rebates, the effects would have been catastrophic for insurance providers. Cigna along with several others shifted focus towards making PBMs a key component of their business models.   

The company recently increased their exposure to the PBM sector after acquiring Express Scripts for $67 billion in December. The goal of the acquisition was to lower costs and improve the quality of treatments by providing access medical care and pharmacy benefits in one single place.

Even with the decline caused by the threat of rebate cuts, sentiment regarding the company and its ability to make a comeback is positive.

A Strong Q1

The company had a strong first quarter, with total revenue reaching $38 billion up from $11 billion in Q1 2018. Shareholder net income grew to $1.4 billion from $0.9 billion over the same time period. EPS increased to $3.90 per share, surpassing the Street’s prediction of $3.73 per share. Cigna also exceeded the $33.1 billion estimate for adjusted revenue, with the actual result being $33.4 billion.

Management attributed this growth to the Express Scripts acquisition as well as its health coverage plans for medium and large-sized companies. President and CEO, David Cordani said, “Cigna's first quarter performance reflects focused execution of our proven growth strategy and positions us well to achieve our increased outlook for 2019.”

Going Forward Into Q2

Ahead of the Q2 earnings release, management is confident more gains are on the way. The company updated its guidance on May 2, saying 2019 adjusted revenue should fall within the range of $133 billion to $135 billion. This is up from the original estimate of $132 billion to $134 billion.

Five-star analyst, Steven Halper, believes that the acquisition wasn’t fully appreciated by investors. “We view the merger with ESRX favorably as the combined company could generate significant synergies and free cash flow. We continue to believe that CI’s risk/ reward tradeoff is highly compelling. $245 price target is supported by our DCF analysis,” he said on May 2 when explaining his decision to reiterate his Buy rating and $245 price target.

Charles Rhyee, a Cowen & Co. analyst, believes that despite a decline in Q1 2019 Health Services adjusted operating profit amounting to 12% year-over-year, investors should not be concerned. “On the face of it, this decrease would suggest something is wrong, but we don't believe that's necessarily the case. We believe one factor driving this could be investment spending to realize cost synergies that are not broken out separately as one-time items,” he said. On May 7, the analyst reiterated his Buy rating on the stock despite lowering the price target from $264 to $254.

The Bottom Line

Wall Street is bullish on Cigna. The stock has a ‘Strong Buy’ analyst consensus, with 10 out of 10 analysts giving the stock a buy rating over the last three months. The average price target is $221, suggesting upside potential of 23%.