Cigna Corp. (NYSE:CI), which recently received antitrust clearances for its $4 billion acquisition of HealthSpring, Inc. (NYSE:HS), has now three distinctive growth drivers for 2012-2013. Despite these drivers, shares of the managed care company trade at a discount compared to the sector overall.
Deutsche Bank believes the company is on track to gain market share in the Commercial business and expects to add 400,000 Commercial members in 2012. In addition, Cigna's acquisition of HealthSpring should help the company grow rapidly in Medicare and the company is expected to continue generating robust growth in its 30+ international markets.
Based on these visible growth drivers, we expect CI to grow revenue by over 40% over the next two years and operating EPS by over 25%, net of an accounting change that will depress operating earnings in International, analyst Scott Fidel wrote in a note to clients.
In the longer term, the HealthSpring deal could create significant additional revenue synergies by giving Cigna an enhanced opportunity to up sell more profitable at-risk Medicare products to its large Commercial retiree population currently primarily enrolled in less profitable administrative services only (ASO) products.
ASO refers to an arrangement where an employer engages an insurance company to handle the administrative tasks (e.g. billing, claims handling, claims payment, qualification, etc.) for their employees. Many large corporations choose this type of insurance arrangement in order to obtain lower pricing from the insurance companies due to the fact that the insurance companies carry no risk obligation.
The analyst, however, reduced his 2011 earnings estimate by 10 cents to $5.25 a share and 2012 earnings estimate by 15 cents to $5.65 a share to reflect the HealthSpring deal and accounting change in the company's international segment. Wall Street expects Cigna to earn $5.28 a share for 2011 and $5.64 for 2012, according to analysts polled by Thomson Reuters.
Nevertheless, Fidel said when considering that Cigna now has three separate fundamental growth drivers for 2012-2013, it didn't seem appropriate the stock was trading at only a 6.5x P/E multiple on his 2013 estimated earnings per share.
While broader market turbulence has weighed on the P/E multiple given balance sheet concerns, we view CI as a well capitalized company with above-average growth prospects in the Commercial, Medicare, and International markets. Based on heavily discounted valuation and attractive growth prospects, CI is currently our top large cap pick in managed care, Fidel said.
Shares of Bloomfield, Connecticut-based Cigna closed Tuesday's regular trading session at $41.98 on the New York Stock Exchange.