By Matt Doiron
Greenlight Capital's investor letter for the fourth quarter of 2012- released this past week- listed CIGNA Corporation (CI) as one of its five largest disclosed long positions. The $16 billion market cap health insurer is up 25% in the last year, essentially doubling the market's performance. Greenlight, which is managed by billionaire David Einhorn, had reported a position of 7.1 million shares at the end of September and shortly afterward Einhorn had listed it as one of his two long stock picks. In his presentation at the Value Investing Congress, he had praised Cigna's acquisition of HealthSpring and the resulting possibilities for increasing Medicare business. Einhorn also claimed that Cigna was more insulated from downside risks to the health insurance industry including negative impacts from federal healthcare policy (read our coverage of Einhorn's case for being long Cigna and see more of his stock picks).
According to the company's most recent 10-Q, total revenue was 31% higher in the third quarter of 2012 than in the same period in 2011 (though some of that increase is likely due to the acquisition). Net income for the quarter was about $470 million, up from about $180 million a year earlier; CIGNA's business in the first half of 2012 had been about even with the first half of the previous year and so the rate of earnings growth when looking at the first nine months of last year was 23%.
Health insurers are generally trading in value territory, possibly as the market worries about the administration's plans for the healthcare sector, and CIGNA is no exception at 11 times trailing earnings. While some of its recent growth has come as a result of acquisitions, we do think that the company has good prospects going forward and so it may well be undervalued at its current price. Analyst expectations imply a current-year P/E of 9 and a five-year PEG ratio of 1. Again, these are appealing value metrics. Another major investor in Cigna at the end of the third quarter of 2012 was Lee Ainslie's Maverick Capital; Maverick owned 6.1 million shares according to its own 13F, making the company one of its five largest holdings by market value. Find more of Ainslie's favorite stocks.
Four other health insurers with market caps greater than $10 billion are Humana Inc. (HUM), WellPoint, Inc. (WLP), UnitedHealth Group (UNH), and Aetna (AET). The trailing earnings multiples at these four companies are in the 9 to 11 range (placing Cigna at the higher end of the valuation spectrum, though Einhorn at least believes this is justified given its competitive advantages) with low earnings growth expected at each in 2013. As a result P/E multiples of 9 are quite common when looking at 2013 earnings estimates.
Aside from Cigna - which likely benefitted from its acquisition - changes in earnings at insurance companies have been very limited. Each of these four peers we have discussed reported less than a 5% change in earnings in its most recent quarter compared with the same period in the previous year, and most changes were within 2% (Humana's net income declined by 4%). The spread in revenue growth rates was slightly greater and UnitedHealth - the largest of the insurers by market cap - saw 11% growth on the top line in the fourth quarter of 2012 from its levels in the same period in 2011.
Overall there is very little in terms of recent financial performance or in terms of earnings multiples to distinguish these five insurers, with the exception of Cigna's recent acquisition, which has helped it achieve high growth rates. It may be worth investigating how much growth can be expected in coming quarters - very little would be necessary to make it the best value relative to its peers. However, a case could be made for an investment in any of these health insurers on the basis of value.