Goldman Adds Cigna To Conviction Buy List, Expects DoJ Announcement To Refocus Investors On Standalone Merits

Goldman Sachs has added

CIGNA CorporationCI

to its Conviction Buy List with 18 percent upside to the stock, saying that the antitrust regulators intention to block Cigna's proposed merger with

Anthem IncANTM

would refocus investors on Cigna's standalone traits.

"While we do not take a view on the whether the transaction will complete, we expect the announcement will likely cause investors to refocus on CI's strong standalone fundamentals driven by a diversified business mix producing forecast mid-to-high single-digit revenue growth and 9–12 percent EPS growth," analyst Matthew Borsch wrote in a note.

If the proposed merger fails to take off, Borsch still thinks Cigna could deploy at least $9 billion, if it brought its debt leverage up to the level of UnitedHealth Group Inc UNH/Anthem/Aetna Inc AET (i.e., mid-40 percent debt/cap).

"This would be equivalent to more than one-quarter of CI's market cap and we estimate could be ~26 percent accretive to our 2018 EPS if used for share repurchase," Borsch highlighted.

The analyst expects EPS of $9.45 for 2016, $10.45 for 2017 and $11.75 for 2018.

Further, the analyst noted that Cigna's margins would be shielded from a "late-cycle" upturn in medical cost/utilization trend given its non-risk (ASO) weighted enrollment.

Borsche cut the price target to $165 from $170 as the analyst removed the M&A component from his model.

Shares of Cigna closed Thursday's regular trading at $140.32 and were seen up 2.14 percent just minutes after Friday's open, trading at $143.32.

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