Cigna Is Trading at a Discount pending the Anthem-Cigna Deal

Diversified Businesses Boost Cigna’s Profit Margins in 4Q15

(Continued from Prior Part)

Cigna’s valuations

After the release of its 4Q15 and 2015 earnings results, Cigna’s (CI) price-to-earnings (or PE) ratio fell from 13.2x on February 4, 2016, to 12.3x on February 8, 2016.

Currently, Cigna is trading at a slightly lower PE ratio than its peer UnitedHealth Group (UNH) but at a higher ratio than peers Aetna (AET) and Anthem (ANTM).

The fair value of a health insurance company is generally calculated using a discounted cash flow model. However, when choosing an investment option, investors also use forward PE multiples to pinpoint the best-priced health insurance company from a given set of health insurance carriers.

Cigna’s fundamentals

Though Cigna’s valuations fell after its 4Q15 results, the company continues to trade at higher PE multiples than Aetna and Anthem. This is mainly due to its limited exposure to the loss-making individual exchange business.

On January 21, 2016, CMS imposed sanctions on Cigna, restricting the company from marketing and enrolling new members in its Medicare plans. Though Medicare is not a substantial portion of Cigna’s total revenues, the sanctions are expected to slightly impact the company’s expected earnings per share (or EPS) in 2016.

Investors are currently uncertain about the success of the Anthem–Cigna deal, so Cigna is trading at a discounted share price compared to Anthem’s offer price. If the deal is successful, it will result in a gain of more than 40% compared to Cigna’s share price as of February 8, 2016. It would also help to boost the iShares U.S. Healthcare Providers ETF (IHF), as Cigna makes up about 6.3% of IHF’s total holdings.

Browse this series on Market Realist:

• Part 1 - Cigna’s Diversification Strategy Boosts Its 4Q15 Earnings

• Part 2 - Strong Sales Drove Cigna’s Global Revenue Growth in 2015

• Part 3 - Customer Growth Drove CI’s Global Supplemental Benefits Business