Cigna Earnings: Decent Results Keep Company on Track To Meet 2023 Goals

Narrow-moat Cigna CI turned in solid second-quarter results and largely maintained its 2023 outlook, which will likely keep our $344 fair value estimate intact. Shares appear moderately undervalued, probably reflecting the renewed regulatory risks in its pharmacy benefit management business. However, those risks appear manageable, as PBMs like Cigna will probably be able to convert most of their rebate or spread-based contracts (about 11% of profits) to fee-based relationships, if necessary.

In the quarter, Cigna mildly exceeded expectations, but its adjusted EPS declined 1% on a 7% revenue increase, as ongoing investments and higher medical utilization pressured results. The firm’s Evernorth business, which includes its PBM operations, delivered 10% revenue and 3% adjusted operating income growth, including 1% prescription growth and ongoing investments related to the recently awarded Centene contract before implementation in 2024. These decent results reflect the expansion of Evernorth’s specialty offerings in the prescription mix, which are more lucrative than its more traditional services. In the firm’s medical insurance business, membership grew 10% year over year, led by its individual exchange and commercial (administrative fee) businesses. Those businesses look likely to remain strong in the near term, too, as renewed Medicaid redeterminations force people to find insurance outside of that government program. Cigna’s medical cost ratio expanded a bit this quarter on increased medical utilization, though, which contributed to this segment’s 5% decline in adjusted operating profits year over year.

Cigna maintained its 2023 goal of at least $24.70 in adjusted EPS and raised its operating cash flow goal by $500 million to at least $9.5 billion. Management also reiterated its EPS goal of $28 for 2024, too. However, our fair value estimate looks unlikely to change due to mild tinkering in our near-term expectations.