The company is coming off a strong quarter and expecting even
more growth in future quarters.
Healthcare provider Cigna (NYSE:CI) was having a lackluster 2019 until the past three months;
since then, its stock has been soaring more than 35%, soundly outperforming
the S&P 500's 11% returns over that time. At a market cap of
$76 billion and trading near its 52-week high, the stock's seen lots of
bullishness of late, but whether it can continue that into 2020 is by no means
a sure thing.
Let's take a close look at what it's been up to
as well as the risks the company is facing to determine whether the stock is a
good investment today.
The Express Scripts
merger is paying off
Cigna's stock began soaring in October after
hovering around its 52-week low. An attractive buy, it became even hotter when
the company released its third-quarter results at the end of the month, which benefited from the
acquisition of Express Scripts. In December 2018, Cigna finalized its purchase
of Express Scripts, valued at $54 billion in a cash-and-stock deal for the
pharmacy benefits manager; the deal has proven to be worth it thus far.
In Q3, Cigna's sales of $38.6 billion increased
237% from the prior-year quarter, when the company recorded just $11.5 billion
in revenue. The increase comes primarily from pharmacy revenue, which is due to
the merger with Express Scripts. A year ago, Cigna recorded just $747 million
in pharmacy sales for Q3, but this past quarter that number's soared to $26
billion. It's now the company's largest segment and accounted for more than
two-thirds of Cigna's top line. The results trickled down to the bottom
line as well, with Cigna's net income nearly doubling from $774 million in the
prior-year quarter to $1.4 billion in Q3 2019.
The company beat expectations and also raised
its forecast for adjusted earnings for 2019, bumping up its projections from a
range of $16.60 to $16.90 per share up to $16.80-$17. The company also
expects earnings per share to rise from 10% to 13% in 2020, which is also the
annual goal the company has "over the long term."
Healthcare uncertainty
could weigh on the stock
One of the risks for healthcare stocks as a
whole is the potential that greater transparency in the industry could put more
scrutiny on insurers and hospitals, leading to lower prices. President Trump
signed an executive order in November relating to the secrecy that exists in
the industry, stating that "We believe the American people have a right to
know the price of services before they go to visit the doctor."
The new law would allow patients to see the
rates that hospitals and insurers have negotiated. It would give patients the
ability to shop around before going to a particular hospital, which could
impact the revenue that healthcare providers like Cigna are able to generate.
While the law may not come into effect until 2021 and will likely face
opposition along the way, it's a risk that investors need to be aware of.
Healthcare could become a key issue in the upcoming federal election, with a
particular focus being on bringing down costs. That could have an adverse
impact on Cigna being able to meet its long-term growth targets.
Why Cigna is a good
buy despite the risks ahead
Although there is uncertainty ahead for the
industry, Cigna remains a solid healthcare stock for investors to add to their portfolios. With Express
Scripts having such a positive contribution to the company's results thus far,
there's plenty of reason to be optimistic. Although Cigna is trading near its
high, at just 16 times earnings and 1.7 times book value, the stock is a good
value buy; a low PEG ratio of 0.91 confirms that.
Management's strong outlook for the future
should give investors plenty of hope that the stock can continue building on
its recent results and that its value will continue to climb. That growth and a
reasonable valuation make Cigna a good stock to buy today.
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