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Bull of the Day: Cigna (CI)

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Health services behemoth Cigna (CI - Free Report) earns our Bull of the Day honor today. This stock sold off at the beginning of 2018, but it has rallied strongly since then, and with the DoJ officially giving the nod to its pending merger with Express Scripts (ESRX - Free Report) , it looks like Cigna could be on the cusp of a strong growth period.

Cigna is a major provider of medical, dental, disability, life, and accident insurance, working directly with massive governmental and non-governmental organizations. It also provides Medicare and Medicaid products.

The company is about to complete its acquisition of Express Scripts, the largest pharmacy benefit manager, in a deal worth $67 billion. This will widen Cigna’s portfolio to include the entire scope of one’s healthcare needs—from drug sales to insurance coverage.

Ideally, this merger will be great for customers, who should see lower costs and improved treatments if the marriage of medical care and pharmacy benefits works to create new efficiencies.

For Cigna, the deal will result in an estimated $650 million of cost synergies and double-digit accretion to earnings in the first year after it closes. The combined company is expected to generate free cash flow of at least $6 billion in 2021.

This bullish outlook as inspired analysts to increase their earnings estimates for Cigna:

The Zacks Rank is rooted in earnings estimates and earnings estimate revisions. We love to see revision trends like that pictured above, as it shows us that analysts are becoming more optimistic about the company’s profitability—a factor that should result in rising share prices. These positive revisions have earned Cigna a Zacks Rank #1 (Strong Buy).

According to the most recent Zacks Consensus Estimates, Cigna is projected to see earnings growth of 32.6% in fiscal 2018 and then an additional 13.5% from that total in fiscal 2019. Revenue growth in those period is expected to touch 9.7% and 6.5%, respectively.

We should also note that part of Cigna’s strong growth outlook is its performance in key segments. In its Global Health Care business, which accounts for three-fourths of total revenue, Cigna achieved a CAGR of 6% for revenues from 2014 through 2017. Revenues were up 11% in the first half of 2018.

Moreover, Cigna is seeing strong growth in its Global Supplemental Benefits unit. This segment is mostly based outside the United States and contributes largely to the overall growth of Cigna. This business recorded a CAGR of 17% for revenues from 2009 through 2017. Revenues were up 18.5% in the first half of 2018.

Valuation wise, Cigna is trading at a slight premium to its industry right now, but the stock still looks quite affordable:

Considering that Cigna has traded as high as 19.99x forward 12-month earnings within the past year, its current multiple of 13.5x looks fine. The stock’s 52-week median earnings multiple is 13.1x, so we’re able to buy Cigna for about what we would expect right now. Again, that’s a slight premium to the industry average, but when we think about the growth outlook that was just mentioned, this is fair.

Finally, we can see that Cigna looks pretty solid based on recent chart patterns. As mentioned, the stock moved to a year-to-date low in early March, and after trading within a tight range for several months, things finally broke higher in late July:

This brief rally topped around the $190 level and went back to range-bound trading, but another sharply rally forced the 50-day moving average over the 200-day, and the stock has been on a roll since then. That’s a pretty attractive trend when we consider that CI still has room to run before breaking into a new 52-week range.

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