The stock of Cigna (NYSE:CI, 30-year Financials) is believed to be modestly undervalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $233.83 per share and the market cap of $80.1 billion, Cigna stock is believed to be modestly undervalued. GF Value for Cigna is shown in the chart below.
Because Cigna is relatively undervalued, the long-term return of its stock is likely to be higher than its business growth, which averaged 38.7% over the past three years and is estimated to grow 5.56% annually over the next three to five years.
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Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Cigna has a cash-to-debt ratio of 0.20, which is worse than 87% of the companies in Healthcare Plans industry. GuruFocus ranks the overall financial strength of Cigna at 4 out of 10, which indicates that the financial strength of Cigna is poor. This is the debt and cash of Cigna over the past years:
It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. Cigna has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $163.1 billion and earnings of $23.11 a share. Its operating margin is 0.00%, which ranks in the bottom 10% of the companies in Healthcare Plans industry. Overall, GuruFocus ranks the profitability of Cigna at 7 out of 10, which indicates fair profitability. This is the revenue and net income of Cigna over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Cigna is 38.7%, which ranks better than 95% of the companies in Healthcare Plans industry. The 3-year average EBITDA growth rate is 33.6%, which ranks better than 81% of the companies in Healthcare Plans industry.
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Cigna’s return on invested capital is 7.56, and its cost of capital is 5.26. The historical ROIC vs WACC comparison of Cigna is shown below:
To conclude, the stock of Cigna (NYSE:CI, 30-year Financials) shows every sign of being modestly undervalued. The company's financial condition is poor and its profitability is fair. Its growth ranks better than 81% of the companies in Healthcare Plans industry. To learn more about Cigna stock, you can check out its 30-year Financials here.
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