Cigna is cheap and has just delivered a strong quarter

Cigna (CI) - one of two medical insurers in my insurance portfolio - has just reported a strong Q3. It is above expectations albeit I do not pay much attention to this. I will not go into details - they are available on Cigna’s site, but want to emphasize several important points:

• Cigna reaffirmed its full-year projection for adjusted EPS of at least 28.40 per share. Currently, it trades at P/Adj. E ~ 313/28.40 ~ 11 (though Cigna is up pre-market when I am writing this). Normally, Cigna does not miss its targets.

• Do not be confused about the Adjusted EPS: historically almost all adjustments are due to the amortization of acquisition-related intangibles. Even the most conservative investors, including Warren Buffett, recognize this adjustment. In Q3, there was also a big adjustment related to realized investment loss. When I normalize insurers’ results for analysis, I tend to ignore these items.

• Cigna’s long-time average for P/Adj. E is close to 15 with a standard error of about 4. Cigna is well-known for using its strong cash flow to repurchase shares. Since issuing stock to acquire Express Scripts in 2019, it reduced its share count from ~380M to ~295M. Buybacks are especially effective when shares are inexpensive.

• Cigna has two advantages over other managed care companies: it has minimal exposure to government programs, and most of its commercial customers are self-insured, using Cigna to operate their programs on a fee basis (though Cigna issues stop-loss policies).

I do not want to think that there are only positive things about Cigna. The stock is very volatile and while it is inexpensive now, it does not mean it cannot become even cheaper. Normally, drops happen in response to politically driven changes in healthcare regulations and policies. Election years are usually the worst for the managed care industry. So far, Cigna has added only 4% YTD.

There are vague rumors about Cigna’s intention to acquire Humana. If true, this is a risk as it will increase Cigna’s exposure to Medicare Advantage. This market can be profitable but it is risky. At the end of the day, it completely depends on Government policies.

Managed care collects a toll from the healthcare system as somebody has to manage healthcare be it private companies or the Government. This toll will rise with ever-going increases in medical spending. Without the introduction of a single-payer system (which is unlikely in the US), Cigna should keep climbing.

Cigna was as high as $364 this year. It might be a good time to open a position or add to your existing position.