Medical Specialities company Cigna is taking Wall Street by surprise today, falling to $336.0 and marking a -4.8% change compared to the S&P 500, which moved 0.0%. CI is -15.38% below its average analyst target price of $397.09, 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 -21.2%, moving 17.3%.
The Cigna Group, together with its subsidiaries, provides insurance and related products and services in the United States. The company is part of the healthcare sector. Healthcare companies work in incredibly complex markets, and their valuations can change in an instant based on a denied drug approval, a research and development breakthrough at a competitor, or a new government regulation. In the longer term, healthcare companies are affected by factors as varied as demographics and epidemiology. Investors who want to understand the healthcare market should be prepared for deep dives into a wide range of topics.
Cigna's trailing 12 month P/E ratio is 26.5, based on its trailing EPS of $12.67. The company has a forward P/E ratio of 10.5 according to its forward EPS of $31.89 -- which is an estimate of what its earnings will look like in the next quarter. As of the third quarter of 2024, the average Price to Earnings (P/E) ratio for US health care companies is 26.07, and the S&P 500 has an average of 29.3. The P/E ratio consists in the stock's share price divided by its earnings per share (EPS), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.
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 1.04 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.
To deepen our understanding of the company's finances, we should study the effect of its depreciation and capital expenditures on the company's bottom line. We can see the effect of these additional factors in Cigna's free cash flow, which was $11.81 Billion as of its most recent annual report. Over the last 4 years, the company's average free cash flow has been $8.1 Billion and they've been growing at an average rate of 15.1%. 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 2.27, but is still below the average P/B ratio of the Health Care sector, which stood at 3.53 as of the third quarter of 2024.
Cigna is likely undervalued at today's prices because it has an average P/E ratio, a lower P/B ratio than its sector average, and generally positive cash flows with an upwards trend. The stock has poor growth indicators because of its decent operating margins with a negative growth trend, and an inflated PEG ratio. We hope this preliminary analysis will encourage you to do your own research into CI's fundamental values -- especially their trends over the last few years, which provide the clearest picture of the company's valuation.
