Cigna (NYSE:CI) shares have struggled amid what has been a positive period for the market as a whole.
CI is down more by than 23 percent on a trailing 12-month basis, and much of that loss has taken place in just the past three months, so is this healthcare titan a stock to stay away from at the moment, or will it stock double once it begins to recover from its recent slide?
Top & Bottom Lines Rise
Part of the reason CI shares are so sold off at the moment is the fact that the stock dropped in the wake of the Q2 earnings report released on July 31st. The selloff, however, comes in spite of the fact that most of Cigna’s metrics were fairly positive.
Revenue, for instance, rose to $67.2 billion from $60.5 billion in the year-ago quarter, a gain of about 11 percent. Net income per share rose from $5.45 to $5.71 over the same period, while adjusted income from operations rose from $6.72 per share to $7.20.
Even more unusual is the fact that Cigna is down on earnings that mostly beat analyst expectations. The revenues Cigna reported were more than 7% above the analyst consensus estimate, while adjusted EPS also delivered a modest positive surprise.
By most standards, Cigna delivered a solid set of Q2 results that don’t seem to align with the sharp dip the stock took after the earnings release.
Part of this disparity may be accounted for with a closer look at Cigna’s segmented results. The Cigna Health segment, which includes Cigna’s US and international healthcare solutions, saw adjusted revenues tumble by 18% during Q2. Much of this decline, however, can be attributed to the divestiture of some of Cigna’s businesses to Health Care Services Corporation earlier this year. Pre-tax adjusted income for this segment also declined 9 percent.
While the Cigna Health results were perhaps lackluster, they were largely made up for by the Evernorth Health segment. This division that includes Cigna’s pharmacy and specialty care services, saw adjusted revenues rise by 17 percent and adjusted income from operations rise by 5 percent.
Net Income Worrisome Over Past 5 Years
Turning to long-term revenue results, we again find that Cigna has been delivering financially.
The business has delivered a remarkable 61 quarters of consecutive revenue growth. One factor that’s worth noting is that growth seems to be slowing, not least evident by the 11% revenue growth Cigna reported in Q2 was the lowest rate since 2023. Even so, Cigna’s management has demonstrated an ability to keep the business expanding at an attractive rate over very long periods of time.
A look at long-term net income growth trends, however, may shed some more light on the disparity between Cigna’s recent performance and its stock price.
Cigna’s net income peaked in 2020 with a full-year total of $8.5 billion but has been trending generally downward since then. In the last 12 months, for example, net income has totaled just $5.0 billion. In Q2, it actually fell by about 1% compared to the year-ago quarter.
Earnings per share have, in contrast, trended in a more positive direction. This phenomenon, however, is explained by a drastic reduction in the number of CI shares outstanding. The share count has fallen from a high of 384 million in 2019 to a current total of just 268 million.
Cigna’s Attractive Valuation Multiples
One of the arguments in favor of Cigna potentially doubling is the fact that the stock appears to be somewhat undervalued at its current price.
CI shares trade at just 14.8x earnings, compared to a sector average of 23.8. Most of the stock’s other key valuation metrics are similarly low, with the price-to-sales ratio at 0.3, the price-to-book ratio at 1.8 and the price-to-operating-cash-flow ratio at 12.4.
This low valuation accounts to some degree for the upside that is expected from CI over the next year. The consensus price target for the stock is just shy of $375, implying an upside of about 40 percent from the most recent price of $267.38.
Encouragingly for current shareholders, the price estimates for CI run from a low of $325 to a high of $407. This range suggests considerable upside even under a more bearish view.
Could Cigna Double From Here?
The lower performance at Cigna Health and the decline of net incomes over the past few years are both somewhat negative trends for Cigna as a business. However, management’s ability to keep revenues increasing while also reducing share counts aggressively enough to keep EPS rising could significantly favor Cigna as an investment. The currently depressed share prices may also present an attractive entry point for investors and give CI a low starting point from which to rise in the future.
Over the coming 3-5 years, analysts are expected Cigna’s earnings per share to keep rising at an annualized rate of about 9.2 percent. Over time, it’s quite likely that this earnings growth will gradually propel CI higher in spite of the market’s currently negative sentiments around the stock.
Furthermore, investors getting into Cigna now have a chance to take advantage of higher-than-average dividend yields. CI shares currently yield 2.3 percent, the highest in Cigna’s history. With a dividend payout ratio that’s still under 35 percent, Cigna may also prove to be a decent dividend growth stock.
All told, it’s unlikely that Cigna shares will double on a rapid timeline, especially with market sentiment on the stock being more negative than one might expect from its performance.
What may be more likely, though, is a significant upward correction that counteracts some of the recent selloff, followed by a more gradual increase as earnings per share keep rising. It may take Cigna some time to recover, but it seems more likely than not that shares in Cigna could eventually rise to double their present level or more.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.