Categories Analysis, Health Care

Here’s a look at the pros and cons of investing in Cigna (CI)

Analysts expect earnings to drop 7% year-over-year to $4.38 per share in the first quarter, the results for which will be published on Friday

After a series of ups and downs, shares of healthcare company Cigna Corporation (NYSE: CI) rose to a record high a few weeks ago, continuing their recovery from the lows seen early last year. The good news is that the stock still looks cheap and offers a good investment opportunity, despite the recent gains.

Buy CI?

It would be a good idea to use the buying opportunity CI currently offers, considering the stock’s growth potential for the remainder of the year. But no investment is fully risk-free these days and a pull-back in the long term cannot be ruled out in Cigna’s case.

When the Connecticut-based diversified healthcare service provider reports its first-quarter results Friday before the opening bell, the market will be expecting earnings of $4.38 per share, which is down 7% from the prior-year period. Meanwhile, revenues are seen rising about 5% to $40.24 billion. In the most recent quarter, the company’s earnings missed analysts’ forecast for the first time in more than four years.

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While the company witnessed an increase in memberships for the government Medicare Advantage plan during the crisis, there has been a dip in the number of commercial customers. The rise in healthcare spends bodes well for its pharmacy business. Overall, The healthcare sector stands to benefit from the ongoing market reopening and the government stimulus.

The COVID Effect

Meanwhile, with the pandemic still around, the performance of the health insurance business would continue to be affected by costs related to COVID testing, care, and vaccination. Considering such headwinds, Cigna’s management recently issued a conservative outlook for fiscal 2021, though it expects synergies from the recently acquired MDLive business to contribute to the top-line in the coming months.

From Cigna’s Q4 2020 earnings conference call:

In 2021, we expect elevated medical costs, including the impact of direct COVID-19 related costs and more normalized non-COVID utilization and we expect the impact of a gradual economic recovery on our customer base in 2021. Given these COVID-19 dynamics, we expect the primary impact to be in our U.S. Medical business. Further, we expect the COVID-19 headwind to be more concentrated in the first quarter of the year, and so, we would expect the cadence of earnings per share in 2021 to be more weighted to the final three quarters of the year.”

Mixed Q4

In the final three months of 2020, Cigna’s adjusted earnings from operations dropped 19% to $3.51 per share and fell short of expectations amid higher insurance claims related to COVID – a trend that is expected to continue because elective procedures which were deferred earlier are being performed after the vaccine roll-out. However, Q4 revenues moved up to $41.7 billion from $38.2 billion in the prior year, exceeding the consensus forecast.

Read management/analysts’ comments on Cigna’s Q4 earnings

Cigna’s shares this week traded close to the record highs seen in mid-April. They have gained a whopping 33% so far this year and are trading far above the 52-week average. At slightly above $250, the stock closed the last trading session higher and continued to outperform the market.

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Ravaging almost every part of the world and crippling economic activity, the coronavirus pandemic has not spared any business. When it comes to the insurance industry, the nature of impact is complex and there is no doubt the companies will struggle with their underwriting decisions once the damage is fully assessed.

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