Operational Efficiency And Evernorth Care Will Drive Future Excellence

Key Takeaways

• Cigna's operational efficiency and strategic optimization are expected to enhance margins and earnings per share growth, positively affecting net margins.
  
• Strong growth from Evernorth and innovations in drug affordability and patient experience are anticipated to boost future revenues and margins.
  
• The company's financial transparency is in question due to non-GAAP measures, operational challenges, recent business sales, and regulatory changes affecting revenue and profitability.

Catalysts

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

• Cigna is focused on operational efficiency initiatives, including a strategic optimization program, which is anticipated to enhance margins and improve earnings per share growth, impacting net margins positively.
  
• Cigna's Evernorth business is driving strong growth through its specialty and care services, which represent a significant growth opportunity with high secular growth rates expected to boost future revenues.
  
• Cigna's efforts in value-based healthcare, including addressing challenges such as access, support, value, accountability, and transparency, are expected to strengthen customer satisfaction and drive sustained long-term growth, positively affecting revenue.
  
• Innovations in drug affordability and patient experience, especially in the specialty drug and GLP-1 categories, are anticipated to reduce costs for clients and increase adoption, positively impacting Cigna's healthcare and pharmacy benefits businesses' revenue and margins.
  
• Strategic capital allocation, including consistent share repurchases and an attractive dividend, is expected to bolster earnings per share growth, reflecting confidence in future cash flow generation and long-term growth prospects.

Cigna Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Cigna Group's revenue will grow by 3.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.0% today to 2.7% in 3 years time.
• Analysts expect earnings to reach $7.6 billion (and earnings per share of $30.86) by about May 2028, up from $5.0 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $9.2 billion in earnings, and the most bearish expecting $5.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.1x on those 2028 earnings, down from 17.7x today. This future PE is lower than the current PE for the US Healthcare industry at 19.7x.
• Analysts expect the number of shares outstanding to decline by 5.96% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

Cigna Group Future Earnings Per Share Growth

Risks

• The use of non-GAAP measures like adjusted income and earnings per share might be masking underlying financial issues, which could impact investor confidence and perceived transparency, ultimately affecting net margins and earnings.
  
• Special item charges, such as the $229 million taken in the first quarter, suggest ongoing restructuring or operational challenges, potentially impacting net margins and future profitability.
  
• The recent sale of the Medicare business might reduce revenue streams in the short term, which could impact overall revenue and growth prospects.
  
• Elevated medical cost trends, especially in Stop Loss, may not be fully offset by pricing and could strain operating profits and net margins.
  
• Continued changes in healthcare policy and regulations, like the Arkansas legislation, may introduce operational risks and unforeseen costs, impacting revenue and profitability.

Valuation

• The analysts have a consensus price target of $373.631 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 $407.0, and the most bearish reporting a price target of just $330.6.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $286.3 billion, earnings will come to $7.6 billion, and it would be trading on a PE ratio of 13.1x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of $333.82, the analyst price target of $373.63 is 10.7% 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.