Cigna Earnings: Medical Insurance Momentum Growing While PBM Preps for Centene Onboarding
Narrow-moat Cigna CI turned in strong third-quarter results and mildly raised its 2023 outlook. At first glance, we 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 (a low-double-digit percentage of profits) to fee-based relationships, if necessary.
In the quarter, Cigna mildly exceeded expectations, as revenue grew 8% and adjusted EPS increased 12%. The firm’s Evernorth business, which includes its PBM operations, delivered 8% revenue and 6% adjusted operating income growth, despite a slight contraction in prescriptions filled and ongoing investments related to the recently awarded Centene contract prior to the 2024 implementation. These solid results reflect expanding Evernorth specialty offerings, which are more lucrative than its more traditional services. In the firm’s medical insurance business, membership grew 9% year over year, led by its individual exchange, commercial, and Medicare Advantage businesses. The individual and commercial businesses look likely to remain strong in the near term, too, as renewed Medicaid redeterminations force people to find insurance outside that government program. On that strong membership growth, insurance operating profits grew 16% in the quarter, as Cigna’s medical cost ratio improved and investment income expanded.
Because of these strong results, Cigna increased its 2023 adjusted EPS goal by a nickel to at least $24.75, and raised its operating cash flow goal by $1 billion to at least $10.5 billion. Management also reiterated its EPS goal of $28 for 2024, too, which may exceed its 10% to 13% long-term growth goal with the onboarding of the Centene PBM contract. Our expectations remain roughly in line with management’s expectations.
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