Earnings Expectations For Cigna Are Low, Deutsche Bank Sees Upside Potential

Chris Rigg of Deutsche Bank initiated coverage of CIGNA Corporation CI with a Buy rating and $172 price target, partly due to the Street's low expectations which creates the scenario for upside revisions.

According to Rigg, Cigna is a standout in the sector as it tailors its commercial insurance offerings to the needs of its customers, including products to small employers that are viewed by others as too small to self-fund. While the company is a small player in this area on a relative basis, it's able to outperform its competitors in client growth.

Rigg also argued Cigna boasts an industry-low medical cost trend which tracked below 4 percent in 2016. This is due to the company's focus on providing the best value for clients (not just price) which also creates solid medical cost outcomes for its clients.

2018 Estimates Are Low

Rigg also highlighted the fact that Cigna plans on using up to $7 billion to buy back its own stock if its transaction with Anthem fails to close as an appeal is underway. Assuming an average cost per share of $160, which is even a premium to the current price, then Cigna can purchase and retire 17 percent of its outstanding share in two years or less.

The company's stock buyback program also implies that the Street's estimates for Cigna's 2018 earnings per share are too low. As such, the analyst sees upside to the current 2018 consensus earnings per share estimate of $10.89 as this figure implies just a "modest" income growth of 3.4 percent in combination with the $7 billion share repurchase program.

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