Evernorth's Patient Experience Investments Will Increase Customer Retention

Key Takeaways

• Corrective actions on elevated medical costs and the Medicare business divestiture are poised to enhance margins and boost earnings per share.
  
• Evernorth's growth in Specialty Services and new customer initiatives will drive revenue growth and improve customer retention.
  
• Increased medical costs and strategic shifts could pressure Cigna's net margins and earnings due to divestitures, investments, and competitive dynamics.

Catalysts

Provides insurance and related products and services in the United States.

• The Cigna Group is addressing elevated medical costs in their Stop Loss product by taking corrective actions to recapture margin over the next two years, which will likely improve net margins and earnings in the Cigna Healthcare segment.
  
• The divestiture of Cigna Healthcare's Medicare business to HCSC is expected to close in the first quarter, with proceeds primarily intended for share repurchase, potentially boosting earnings per share (EPS).
  
• Evernorth, Cigna's health services segment, demonstrates strong growth, particularly in Specialty and Care Services, which is expected to continue growing due to increased use of biosimilars. This should positively impact revenue and earnings.
  
• New initiatives by Cigna, such as ensuring customers do not pay list prices at the pharmacy counter and providing patients the benefit of negotiated savings, aim to improve customer experience. This could lead to higher customer retention and growth, ultimately impacting revenue positively.
  
• Planned investments in improving health care experience, addressing patient friction points, and enhancing transparency are expected to incur additional costs, but should support long-term revenue growth and operational efficiencies.

Cigna Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Cigna Group's revenue will grow by 3.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.4% today to 2.8% in 3 years time.
• Analysts expect earnings to reach $7.8 billion (and earnings per share of $29.82) by about March 2028, up from $3.4 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $10.4 billion in earnings, and the most bearish expecting $6.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.7x on those 2028 earnings, down from 25.6x today. This future PE is lower than the current PE for the US Healthcare industry at 24.9x.
• Analysts expect the number of shares outstanding to decline by 3.66% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.37%, as per the Simply Wall St company report.

Cigna Group Future Earnings Per Share Growth

Risks

• Higher-than-expected medical costs in Cigna Healthcare's Stop Loss product could lead to reduced margins and increased pricing pressure, impacting net margins and earnings.
  
• The divestiture of the Medicare business and related transitional costs could temporarily reduce revenue and result in stranded overhead, impacting overall earnings.
  
• Investments to improve patient and provider experiences are expected to incur additional costs of up to $150 million, which may weigh on net margins and earnings in the short term.
  
• Competitive pressures in the pharmacy benefit services space and client preferences for full rebate pass-throughs could squeeze margins, affecting net margins in Express Scripts' profitability.
  
• Increased exposure to high-cost specialty pharmaceuticals and high-acuity surgeries without sufficient price adjustments may lead to persistently elevated medical care costs, impacting the medical care ratio and earnings.

Valuation

• The analysts have a consensus price target of $362.305 for Cigna Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $405.0, and the most bearish reporting a price target of just $323.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $274.6 billion, earnings will come to $7.8 billion, and it would be trading on a PE ratio of 13.7x, assuming you use a discount rate of 6.4%.
  
• Given the current share price of $321.02, the analyst price target of $362.31 is 11.4% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.