Seeking Alpha
Profile| Send Message|
( followers)  

Cigna (NYSE:CI), like its peers United Healthcare (NYSE:UNH), Aetna (NYSE:AET) and Well Point (NYSE:WLP) hopes to grow its business out of its cyclical rut by jumping on to the managed Medicare bandwagon.

Medicare Advantage, the privately run version of Medicare is likely to increase in scope as more baby boomers need Medicare over the next ten years.

Zacks estimates that the overall health care market will grow at a CAGR of 6% over the next decade, but the managed care market will grow faster at 10%.

Cigna acquired Spring Well in January 2012 for $ 3.8 Bn in cash and stock to gain a foothold in this market, paying Spring Well 1.2 times sales and 19 times profits, hoping to continue growing at 28% -- essentially Spring Well's CAGR from 2009 to 2011.

Cigna picks up 340,000 customers or about 3% of the market, assuming that 25% of 46 Mn Medicare customers or 11.5 Mn people participate in the Advantage program. Cigna follows Aetna picking up Genworth's Medicare, United acquiring XLHealth and Well Point taking over Care More Health group.

I believe the acquisition makes strategic sense, especially for Cigna, whose net income stagnated with a CAGR of 4.5% in the last four years, in spite of a sales growth of 6%. Even after sales bottomed out in 2009, profits did not keep pace.

What could go wrong for Cigna?

Health Care Reform Act implications

Since some of the reforms will only be enacted later, one key reform of maintaining medical loss ratios is likely to impact profits. The law requires that if the insurer has not spent enough of the insured's premiums, it has to give it back as rebates to the insured; In 2011 Cigna provided $ 41 Mn as rebates.

While overall revenues are likely to grow in the Medicare Advantage segment, the lack of funds and budgetary cuts are very likely to impact insurers. Additionally Health Care Reform also reduced Medicare premium rates in 2011, benchmarked premiums to Medicare fee-for-service, reduced enrollment periods and added limitations on disenrollment.

CIGNA

AETNA

United Health Care

Well Point

Market Cap $ Bn

13.81

17.30

62.40

23.57

Employees:

31,400

33,300

99,000

37,700

Revenue (TTM): $ Bn

22.00

33.78

103.71

60.71

Operating Margin :

9.9%

10.3%

8.3%

7.3%

Net Income : $ Bn

1.33

1.99

5.18

2.65

EPS :

4.84

5.22

4.82

7.25

P/E :

9.96

9.46

12.22

9.71

NPM

6.0%

5.9%

5.0%

4.4%

Rev / Employee $ (000)

701

1,014

1,048

1,610

LTD $ Bn

4.98

4.40

11.64

9.70

Equity $ Bn

8.34

10.12

28.29

23.30

Debt Equity Ratio

60%

43%

41%

42%

With headcount ballooning to 31,400 people, Cigna's profits have not kept up with revenue growth - its revenue per employee is very low at $ 701,000. After revenues bottomed out in recession 2009 at 16.61 Bn, Cigna grew sales at 10% a year, but profits did not keep pace.

Higher debt levels of 60% of equity -- the worst amongst its peers in our table above, has crimped profits and hurt its chances for further acquisitions. This industry, which is characterized by cut throat competition and little product differentiation, needs further consolidation and Cigna's comparatively lower cash hoard makes acquisition led growth difficult in the future.

Cigna diluted its equity by 15.2 Mn shares to acquire Spring Well; given the high debt levels and lack of cash muscle, I would hate to see further dilution.

Buy on declines

I believe it would be a good long term buy at about 44. At that price it would be 10% lower than its comparative low price earning multiple of 10 trailing earnings.

Source: Cigna: A Lot Riding On Managed Medicare