Goldman Says Investors Get Both Offense And Defense In Buying Cigna Stock

Goldman Sachs' Matthew Borsch believes Buy-rated CIGNA Corporation CI presents a favorable risk/reward profile, in which investors can purchase "offense" and "defense."

The analyst noted that Cigna offers best-in-class growth at a discount to peers, in addition to potential deployable capital and defensive positioning through fee-based revenue in a rising-medical-cost environment.

Borsch says CI trades in the bottom quartile of MCO's when screen on 2017 P/E. Meanwhile, the analyst estimate CI's 2016-2018 CAGR at nearly 17 percent, versus the large-cap MCO average of about 12 percent.

That said, the analyst noted his estimates are conservative, as they still sit below the last eight years of D&L earnings.

Further, Borsch thinks Cigna is underleveraged and sees a levered share repurchase as a potential scenario.

"In the scenario of a hypothetical share repo, we see accretion of more than 34% on 2018 EPS with ~$10bn of deployable capital," Borsch wrote in a note.

On defensive positioning, the analyst still highlights that underlying medical cost trends are still a risk for margins given recent acceleration in utilization demand.

"Considering this backdrop, we prefer Cigna and believe it positions defensively in light of its higher mix of fee-based business. We estimate nearly 40% of earnings are from C-ASO, which should theoretically help shield against an uptick in trend as there is less capital at risk in the event of inadequate pricing," Borsch noted.

The analyst maintained his price target of $160.