Cigna: Can Digital Healthcare Propel Cigna’s Stock Price Higher?
Throughout 2021, we’ve witnessed a fairly strong rally throughout the broad markets. However, there are certain sectors/industries that have been left behind. And, generally speaking, the healthcare segment is one of them.
The Healthcare Sector Select SPDR (XLV) is up 8.96% on a year-to-date basis, and 21.44% during the trailing 12 months, which means that it is underperforming the SPDR S&P 500 Trust ETF (SPY) by a significant margin. The SPY is up 12.35% year-to-date and 38.64% during the trailing 12 months, which implies that on a relative basis, it has outperformed the XLV by 37.8% thus far during 2021 and by approximately 80% during the past year.
There are a myriad of reasons for this underperformance; however, fear surrounding healthcare reform, such as government oversight of prescription drug pricing, appears to be the biggest headwind that investors thinking about healthcare face. And yet, while there are constant headwinds abound, there are still very high quality companies that are generating strong profit growth and who benefit from secular growth tailwinds in the sector. In other words, fear has resulted in babies being thrown out with the bath water in this space and one such stock which the blue chip analysts who the Nobias algorithm tracks really like at the moment is Cigna (CI).
One such secular trend that we’ve seen accelerated by the COVID-19 pandemic is the digitization of healthcare. Increased internet penetration, cloud computing, and the ongoing 5G revolution has already revolutionized the healthcare industry and we’re still in the early innings of this transition.
Nobias 5-star rated analyst, David Jagielski recently wrote a Motley Fool article titled “2 Bargain Stocks You Can Buy Right Now” which highlighted his bullish opinion of Cigna, which was largely centered around this company’s investments into digital healthcare assets. Jagielski said, “Health insurance company Cigna may not be your typical growth stock. While its business is safe and diversified with sales in 30 countries serving 185 million customers, what makes it an appealing investment right now is the potential that it gained from the acquisition of telehealth company MDLive.”
With regard to this telehealth service, Jagielski highlighted the expected growth of the industry at large, saying, “Telehealth is the sector to be in; analysts from Research and Markets project that the industry will be worth nearly $192 billion in 2025 -- up from $38.7 billion last year.”
There are concerns amongst investors that in a post-pandemic world, the telehealth demand may fall as consumers return to their normal ways of life, which includes in-person doctor visits. Also, we’ve seen enormous competition in the telehealth industry, causing former market darlings, like Teledoc Health (TDOC), which has lost roughly half of its market capitalization in recent months, falling from nearly $300/share in mid-February to just $150/share today, to experience significant weakness.
However, Jagielski addressed these concerns, expressing his opinion that the quick adoption of telehealth services that we’ve seen throughout the pandemic will prove to be much more than fleeting, saying, “While the pandemic made telehealth visits popular, investors shouldn't expect them to end, as patients have gotten used to the convenience of not having to make in-person trips to the doctor's office.” And, with this in mind, he believes that the relationships that Cigna can cultivate with consumers via the MDLive service has the potential to begin “paving the way for significant long-term growth.”
It’s important to note that unlike some of the more speculative investments in the healthcare space centered around the adoption of telehealth, Cigna is a highly profitable company that trades with a relatively cheap valuation. During 2020, Cigna generated total revenues of $160.4 billion and adjusted income from operations of $6.8 billion.
The company raised its 2021 full-year guidance during its recent first quarter report. CI management is now calling for $166 billion in revenues this year, with adjusted income from operations coming in at approximately $7 billion. At $258/share, CI is trading for just 13.5x blended earnings and due to consensus earnings estimates that point towards 11% growth on the bottom-line in 2021, Cigna’s forward price-to-earnings ratio is just 12.65x.
Cigna’s current multiple is essentially in-line with the stock’s long-term average; however, the addition of the digital growth prospects into a bull thesis here leads some to believe that shares should be trading with a premium valuation attached. Jagielski appears to think so, saying that the company’s valuation is “cheap given that industry giants Johnson & Johnson and UnitedHealth Group trade at 17 and 21 times their future earnings, respectively.”
One potential downside that investors need to consider when it comes to CI shares is the company’s debt. Continued growth in the digital space is likely going to require further investment into digital assets and therefore, balance sheet strength is paramount in the healthcare industry.
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
Nobias 5-star rated analyst, Simply Wall Street, recently published an article on Nasdaq.com, highlighting CI’s balance sheet and noting a cautious outlook looking forward. Simply Wall Street says that at the end of 2020, CI carried total debt of $32.9 billion and net debt of $21.4 billion (after factoring in the company’s $11.5 billion cash position). The analyst continued saying, “We can see from the most recent balance sheet that Cigna had liabilities of US$36.0b falling due within a year, and liabilities of US$69.0b due beyond that. Offsetting these obligations, it had cash of US$11.5b as well as receivables valued at US$12.2b due within 12 months. So it has liabilities totalling US$81.4b more than its cash and near-term receivables, combined.”
Simply Wall Street is concerned about the company’s balance sheet because of the size of the liabilities relative to the company’s market cap, which currently sits at $89 billion. What’s more, the analyst wrote, “Cigna's net debt is sitting at a very reasonable 2.0 times its EBITDA, while its EBIT covered its interest expense just 6.4 times last year. While that doesn't worry us too much, it does suggest the interest payments are somewhat of a burden.”
Concluding their piece, Simple Wall Street said, “When it comes to the balance sheet, the standout positive for Cigna was the fact that it seems able to convert EBIT to free cash flow confidently. But the other factors we noted above weren't so encouraging. For example, its level of total liabilities makes us a little nervous about its debt.” The analyst noted that “Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.”
This is a risk that bullish investors here need to consider; however, when looking at analysts deemed credible by the Nobias algorithm, the sentiment surrounding CI stock remains positive, with 3 recent published opinions leaning bullish compared to just 1 recent bearish opinion.
Disclosure: Nicholas Ward is long Johnson and Johnson. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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