Company Reports

Narrow-moat Cigna turned in strong first-quarter results and raised its 2024 outlook a bit. At first glance, we do not anticipate changing our $366 fair value estimate, though, and we consider shares about fairly valued.

In an unusual development, the Centers for Medicare & Medicaid Services released its final Medicare Advantage, or MA, rate notice that matched its initial rate notice, instead of rising. In this final rate notice, the overall increase in MA revenue to insurers remained lower than the risk score trend, which is likely to pressure MA benefits, pricing, and/or insurer profits in 2025. We are reducing our fair value estimate on Humana by 5% on this disappointing development, given its focus on MA and our expectation that its previous profit goal in 2025 and potential growth in subsequent years may be constrained. However, we are not changing our fair value estimates on the other more diverse managed care organizations, or MCOs, that we cover, and market price declines on this news may create more attractive investment opportunities for investors with a long-term investment horizon. Currently, Humana, CVS, and Centene remain the most attractive MCOs on a price/fair value basis.

At its investor day, narrow-moat Cigna's management mildly increased its long-term adjusted earnings growth goal (to 10%-14% from 10%-13%) primarily on tailwinds in its specialty pharmacy business. While we appreciate those trends, we are raising our fair value estimate to $366 per share from $344 primarily because of cash flows generated since our last valuation update in May 2023. Shares remain fairly valued.

With its roots in health insurance and the late 2018 merger with top-tier pharmacy benefit manager Express Scripts (renamed Evernorth), Cigna provides healthcare-related services through customizable programs paid for primarily by US employers and government agencies. We think its strategy of reducing medical cost growth should resonate well with existing and potential clients. Its position as a leading provider of specialty pharmacy offerings, which is one of the fastest-growing areas of healthcare, puts it at the unique position of being able to both control and benefit from the rise of that end market.

Narrow-moat Cigna turned in strong fourth-quarter results and raised its 2024 outlook a bit. This week, Cigna also announced the sale of its Medicare-related businesses to a large Blue Cross/Blue Shield insurer, Health Care Services Corporation, with proceeds largely expected to be used for share repurchases after closing in early 2025. This deal should help Cigna focus more on what it does best in insurance—serve commercial payers. When considering all of these factors, we do not anticipate changing our $344 fair value estimate.

After merger rumors surrounded narrow-moat Cigna and Humana in recent weeks, Cigna announced other capital allocation priorities that look more appropriate to us, especially given antitrust concerns that likely would have surrounded the pharmacy benefit management part of the rumored combination. We are keeping our fair value estimates for both organizations intact. Following their decline since deal rumors were highlighted a couple of weeks ago, Cigna's shares look especially attractive relative to our fair value estimate.

The Wall Street Journal has reported that two of the major managed-care organizations that we cover—Cigna and Humana—are in merger talks that could be completed by the end of this year. Both Cigna and Humana have narrow moats surrounding their businesses, which primarily consist of medical insurance, pharmacy benefit management, or PBM, and healthcare service operations. Given how speculative this potential deal is at this stage and the antitrust concerns that would likely surround this combination, we are not changing our fair value estimates on either firm.

Narrow-moat Cigna turned in strong third-quarter results and mildly raised its 2023 outlook. At first glance, we will likely keep our $344 fair value estimate intact. Shares appear moderately undervalued, probably reflecting the renewed regulatory risks in its pharmacy benefit management business. However, those risks appear manageable, as PBMs like Cigna will probably be able to convert most of their rebate or spread-based contracts (a low-double-digit percentage of profits) to fee-based relationships, if necessary.

In advance of the Medicare open enrollment period that starts on Oct. 15, the Centers for Medicare & Medicaid Services, or CMS, released its star ratings that measure the performance of the Medicare Advantage, or MA, plans offered by private insurers. At first glance, we do not anticipate changing our fair value estimates for any managed-care organization, or MCO, based on this new data. However, even as overall MA star ratings largely stabilized after a big drop last year, there were some clear winners and losers in this year's scoring that could affect market sentiment for MCO shares.

Near-term uncertainty is creating an opportunity for long-term investors in the managed-care organization segment. Of the six narrow-moat MCO stocks that we cover—Centene, Cigna, CVS Health, Elevance, Humana, and UnitedHealth—five are trading in undervalued territory, and even the typically premium-priced UnitedHealth looks reasonably valued to us.

With its roots in health insurance and the late 2018 merger with top-tier pharmacy benefit manager Express Scripts, Cigna provides healthcare-related services through customizable programs paid for primarily by U.S. employers and government agencies. We think its strategy of reducing medical cost growth should resonate well with existing and potential clients. Cigna has set an ambitious goal to push down healthcare cost trends to or even below the low-single digits in the near future. If Cigna can achieve that goal, clients should benefit along with Cigna, and we think this reduction in its cost trend may help the company attract more business from existing and potential clients.

Blue Shield of California announced that it was dropping CVS Health for its nonspecialty pharmacy benefit management services in favor of a coalition of providers, including Amazon and the Mark Cuban Cost Plus Drug Company. While these organizations have been making noise as potential PBM entrants for a while, this contract win looks like the first one with any real teeth, in our opinion, and could signal the start of a change in the PBM competitive landscape, particularly for top-tier players CVS, Cigna, and UnitedHealth. We do not expect to change our narrow moat ratings on these MCOs because of this announcement, though.

Narrow-moat Cigna turned in solid second-quarter results and largely maintained its 2023 outlook, which will likely keep our $344 fair value estimate intact. Shares appear moderately undervalued, probably reflecting the renewed regulatory risks in its pharmacy benefit management business. However, those risks appear manageable, as PBMs like Cigna will probably be able to convert most of their rebate or spread-based contracts (about 11% of profits) to fee-based relationships, if necessary.

Narrow-moat Cigna turned in solid first-quarter results, and the firm mildly increased its 2023 outlook. Considering these solid trends and cash flow generated since our last valuation change, we are boosting our fair value estimate 7% to $344 per share. Shares remain moderately undervalued, probably reflecting some of the renewed regulatory risks to its pharmacy benefit management, or PBM, operations. However, we think those risks will be manageable over time.

With its roots in health insurance and the late 2018 merger with top-tier pharmacy benefit manager Express Scripts, Cigna provides healthcare-related services through customizable programs paid for primarily by U.S. employers and government agencies. We think its strategy of reducing medical cost growth should resonate well with existing and potential clients. Healthcare cost trends in the United States remain significantly above inflation, but Cigna has set an ambitious goal to remedy that for its commercial clients, pushing down that trend to or even below the low-single digits in the near future. If Cigna can achieve that goal, clients should benefit along with Cigna, and we think this reduction in its cost trend may help the company attract more business from existing and potential clients.

Narrow-moat Cigna turned in strong fourth-quarter results that allowed the firm to exceed our expectations for 2022 a bit. However, that mild outperformance combined with 2023 guidance that looks roughly in line with our expectations was not enough to change our $321 fair value estimate. Shares appear about fairly valued, to us.

Narrow-moat Cigna turned in better-than-expected third-quarter operating results that allowed management to boost its 2022 outlook a bit. After incorporating recently generated cash flows (primarily) and mildly stronger recent trends (secondarily), we are raising our fair value estimate in the midsingle digits on a percentage basis. Shares appear about fairly valued, in our opinion.

With its roots in health insurance and the late 2018 merger with top-tier pharmacy benefit manager Express Scripts, Cigna provides healthcare-related services through customizable programs paid for primarily by U.S. employers and government agencies. We think its strategy of reducing medical cost growth should resonate well with existing and potential clients. Healthcare cost trends in the United States remain significantly above inflation, but Cigna has set an ambitious goal to remedy that for its commercial clients, pushing down that trend to or even below the consumer price index in the near future. If Cigna can achieve that goal, clients should benefit along with Cigna, and we think this reduction in its cost trend may help the company attract more business from existing and potential clients.

The Centers for Medicare and Medicaid, or CMS, released Star Ratings for its Medicare Advantage plans that appear to have declined across the board. In this rating system that is used to identify the highest quality plans and determine bonus payments that plans can share with provider networks, CMS standards appear to have changed, causing contractions in membership percentages in 4-Star plans or better, which could mildly affect financial results of some managed care organizations, or MCOs. For example, CVS's Star Ratings looked relatively weak, causing shares to decline in the midsingle digits in early trading Oct. 7. While we have pulled back on some intermediate-term assumptions for CVS, management has already announced plans to offset these headwinds to meet its longer-term earnings growth goals, including double-digit earnings growth by 2024. Overall, we are not materially changing our fair value estimates or narrow moat ratings for any of the MCOs that we cover based on our initial take of these Star Ratings.

Narrow-moat Cigna turned in strong second-quarter operating results that allowed management to boost its 2022 outlook a bit. Even after incorporating these mildly stronger near-term expectations, our $299 fair value estimate has not changed materially. Shares appear to be moving closer to fair value due to the company's operational momentum.