Cigna Offers a Healthy Opportunity for Investors
If you've been following the fortunes of Cigna (CI) - Get Reportin recent quarters, you'd know that business improved for the company, but at the same time, the 10% drop in Cigna shares over the last three months has transformed the stock into a great value for investors.
Cigna will report earnings on Nov. 6. The company offers a compelling story for investors.
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Cigna and its subsidiaries are a chain of investor-owned health care entities. It is a major provider of health care benefits offered through the workplace. The company boasts a $34 billion market cap.
In July, rival Anthem (ANTM) - Get Reportreached an agreement to acquire Cigna, for $48 billion. The deal still has to pass regulatory and other hurdles. In the interim, Cigna is a strong buy at current levels.
Cigna is expected to report another robust set of quarterly earnings with EPS marked at $2.20 compared to $1.95 a year ago, and revenues coming in at $9.51 billion, almost 9% ahead of the year ago period. The company has consistently beaten consensus analysts' estimates in the last 12 months. It has maintained steady earnings growth over the last five years at 12%-13%. The road ahead (with or without the Anthem buy-out) doesn't appear to be any different.
At a gross margin level, Cigna is better than its rivals including Humana, Anthem, UnitedHealth Group and Aetna. This also holds true for operating margins. Similarly, on a return on capital metric, Cigna is right near the top. At an expected five-year price to earnings growth (PEG) ratio of 1.19, Cigna is cheaper compared to its rivals.
Humana, which also reports earnings on Friday is expected to post a 20% rise in EPS at $2.15 for the quarter on 11.40% growth in sales at $13.46 billion. The company, it seems, has lost its ability to shine, with actual EPS lagging estimates in three of the last four quarters. Fiscal 2015 will see it post overall EPS growth of 3.3%, which is anemic compared to how the industry is faring. Bear in mind, Cigna is on course to deliver a solid 16% rise in EPS for 2015.
At a recent Morgan Stanley conference, Cigna CEO David Cordani laid out the case for a Cigna/Anthem merger. He argued that the combination of the companies would create a broader foundation for growth. The ability to create a streamlined network and leveraging the strengths of each company to deliver differentiated services to a broader set of clients would expedite expansion plans and boost margins through cost savings. It's the sort of consolidation that's transforming the sector, as health care giants seek economies of scale to meet the demands and opportunities of Obamacare.
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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.