Morningstar | Cigna's 1Q Consistent With Strong Start to 2019 For Managed Care
Narrow-moat Cigna reported first-quarter results that tracked in line with our full-year expectations. We don’t anticipate altering our $231 fair value estimate, and believe shares look attractive trading at 9.5 times our current adjusted earnings forecast for 2019. However, given the ongoing integration of Express Scripts and the loss of Anthem's pharmacy benefits business, we'd emphasize our high uncertainty rating on the name.While the effects of integration, segment reclassifications, and the firm's disclosures for Anthem make insightful year-over-year comparisons for the combined Cigna and Express Scripts business fairly difficult, we think it performed reasonably well in the quarter. Overall profitability, excluding Anthem, surpassed our expectations, although roughly half of this excess can be attributed to favorable prior-year development of the firm's medical cost reserves. This figure accounted for management raising the guidance outlook slightly for the full year. At legacy Express, the firm largely met our expectations for revenue and adjusted profitability after excluding the contribution from Anthem.
Medical enrollment growth was the most disappointing figure, in our view, because the bulk of the company's membership showed little improvement versus the end of 2018. The commercial risk book had a respectable 4% sequential improvement, but the remainder of the firm's product segments will have to show growth over the next few quarters to meet management's target of 300,000 to 400,000 net member additions for the year.
Management's post-transaction capital deployment strategy remains on track, with operating cash flow largely allocated toward $1.9 billion in debt repayments and $462 million in share repurchases. Given the stock's discounted valuation, we applaud these balanced efforts to right-size the company's capital structure. Cigna remains on a path to achieving a debt-to-capital ratio in the high 30% range by the end of 2020.
Cigna is a global health service organization. The company's segments are: Integrated Medical, which includes its employer-sponsored medical coverage and Medicare offerings for seniors and individual insurance offerings to non-seniors both on and off the public health insurance exchanges; Health Services, which consists of the pharmacy benefit management and certain health management services; International Markets, which provides a range of medical and supplemental health, life, and accident benefits to individuals and employers; and Group Disability and Other, which includes its commercial long- and short-term disability products, and its term life group insurance products.
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