Shares of Cigna Underperform the Market. What Do the Numbers Tell Us?

Medical Specialities company Cigna is taking Wall Street by surprise today, falling to $287.64 and marking a -3.9% change compared to the S&P 500, which moved -0.0%. CI is -12.1% below its average analyst target price of $327.22, which implies there is more upside for the stock.

As such, the average analyst rates it at buy. Over the last year, Cigna has underperfomed the S&P 500 by -6.0%, moving 4.0%.

The Cigna Group, together with its subsidiaries, provides insurance and related products and services in the United States. The company is categorized within the healthcare sector. The catalysts that drive valuations in this sector are complex. From demographics, regulations, scientific breakthroughs, to the emergence of new diseases, healthcare companies see their prices swing on the basis of a variety of factors.

Cigna's trailing 12 month P/E ratio is 13.2, based on its trailing EPS of $21.81. The company has a forward P/E ratio of 10.2 according to its forward EPS of $28.23 -- which is an estimate of what its earnings will look like in the next quarter. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the first quarter of 2023, the health care sector has an average P/E ratio of 24.45, and the average for the S&P 500 is 15.97.

It’s important to put the P/E ratio into context by dividing it by the company’s projected five-year growth rate. This results in the Price to Earnings Growth, or PEG ratio. Companies with comparatively high P/E ratios may still have a reasonable PEG ratio if their expected growth is strong. On the other hand, a company with low P/E ratios may not be of value to investors if it has low projected growth.

Cigna's PEG ratio of 1.08 indicates that its P/E ratio is fair compared to its projected earnings growth. Insofar as its projected earnings growth rate turns out to be true, the company is probably fairly valued by this metric.

When we subtract capital expenditures from operating cash flows, we are left with the company's free cash flow, which for Cigna was $9.95 Billion as of its last annual report. Over the last 4 years, the company's average free cash flow has been $10.07 Billion and they've been growing at an average rate of -1.4%. With such strong cash flows, the company can not only re-invest in its business, it can afford to offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in CI have received an annualized dividend yield of 1.5% on their capital.

Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts). Cigna's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 1.92, but is still below the average P/B ratio of the Health Care sector, which stood at 4.16 as of the first quarter of 2023.

Since it has a very low P/E ratio, a lower P/B ratio than its sector average, and a steady stream of strong cash flows with a flat trend, Cigna is likely undervalued at today's prices. The company has mixed growth prospects because of an average PEG ratio and weak operating margings with a stable trend. We hope you enjoyed this overview of CI's fundamentals. Be sure to check the numbers for yourself, especially focusing on their trends over the last few years.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.