Expansion Of EnCircleRx And AI Diagnostics Will Improve Personalized Healthcare

Key Takeaways

• Anticipated biosimilar ramp-up and Evernorth client growth expected to boost revenue and margins, supporting overall financial performance.
  
• Divestiture funds for share repurchases likely to enhance earnings through EPS accretion, aiding earnings growth.
  
• Divestiture and elevated costs could strain Cigna's revenue and profit margins amid increased competition and challenging market conditions.

Catalysts

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

• The anticipated ramp-up of biosimilar offerings and new client relationships in Evernorth are expected to drive top-line growth and affordability, positively impacting both revenue and net margins.
  
• The divestiture of the Medicare business with the majority of proceeds planned for share repurchases is expected to provide EPS accretion, supporting earnings growth.
  
• Emphasis on continued investment in pharmacological innovation, such as new therapies and Specialty Pharmacy growth, positions Cigna to benefit from secular market trends, driving future revenue.
  
• Expansion of EnCircleRx, aiming at managing affordability for high-cost GLP-1 drugs, is anticipated to contribute to revenue growth and margin improvement through innovative clinical management.
  
• Plans to harness forces of change in technology-enabled innovations, like AI-powered diagnostics, are set to improve personalized care and potentially enhance revenue opportunities and operational efficiencies.

Cigna Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Cigna Group's revenue will grow by 6.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.3% today to 2.7% in 3 years time.
• Analysts expect earnings to reach $7.4 billion (and earnings per share of $31.41) by about December 2027, up from $3.0 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $4.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.1x on those 2027 earnings, down from 24.3x today. This future PE is lower than the current PE for the US Healthcare industry at 21.9x.
• Analysts expect the number of shares outstanding to decline by 5.33% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.07%, as per the Simply Wall St company report.

Cigna Group Future Earnings Per Share Growth

Risks

• The write-down of the remaining carrying value of the VillageMD asset and the absence of its dividend income present a risk to net investment income, which could impact net margins due to decreased revenue streams impacting net earnings.
  
• Special item charges of $162 million in the third quarter highlight potential recurring or unexpected costs that may negatively affect earnings if these continue or increase in frequency or size.
  
• The sale of the Medicare Advantage business, while providing funds for share repurchase, may lead to stranded overhead costs and loss of associated revenue, creating a challenge for maintaining revenue and profit margins.
  
• Increased competition and challenging market conditions, specifically in the Medicare Advantage market, could impact future revenues if they result in lost market share or reduced pricing power.
  
• Elevated medical cost trends, especially in specialty medications, pose a risk to medical care ratio targets which, if not managed, could compress profit margins and challenge earnings growth.

Valuation

• The analysts have a consensus price target of $396.77 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 $438.0, and the most bearish reporting a price target of just $344.78.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $275.6 billion, earnings will come to $7.4 billion, and it would be trading on a PE ratio of 15.1x, assuming you use a discount rate of 6.1%.
• Given the current share price of $265.59, the analyst's price target of $396.77 is 33.1% 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.