Cigna Earnings: Solid Trends Boost Outlook and Fair Value, Despite Regulatory Scrutiny on PBM

Narrow-moat Cigna CI turned in solid first-quarter results, and the firm mildly increased its 2023 outlook. Considering these solid trends and cash flow generated since our last valuation change, we are boosting our fair value estimate 7% to $344 per share. Shares remain moderately undervalued, probably reflecting some of the renewed regulatory risks to its pharmacy benefit management, or PBM, operations. However, we think those risks will be manageable over time.

In the quarter, Cigna exceeded expectations on better-than-anticipated medical insurance trends. Specifically, its medical membership grew 10% year over year, which was led by individual exchange and Medicare Advantage growth. Cigna’s medical cost ratio also improved, which was a key reason for Cigna’s bottom-line outperformance during the quarter that led management to boost its full year outlook. The company’s Evernorth business, which includes its PBM operations, delivered 8% revenue and 1% adjusted operating income growth, despite a 1% decline in prescription volumes and ongoing investments related to the recently awarded Centene contract that is cutting into its bottom line before contract implementation that is scheduled for 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.

With this quarter’s solid trends, the company increased its bottom-line expectations for 2023 slightly to adjusted EPS of at least $24.70, and the firm still expects operating cash flow of at least $9 billion. Minor tweaks to our near-term assumptions positively influenced our fair value change slightly, but not nearly as much as recent cash flows. Also, although renewed regulatory scrutiny on the PBM business creates some risk to profits, we suspect Cigna will be able to manage those challenges.