Investing

Hot Stock: Cigna

The best buy in health care?

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For Canadians looking to diversify their holdings into health care, they’ll have to look south to find the best deals. The sector makes up about 3% of our market, while it accounts for closer to 13% in the States. While there are a lot of businesses to chose from, one company that a number of analysts are talking about these days is Bloomfield, Conn.-based Cigna Corp (NYSE: CI).

This company is a diversified health and benefits business. It provides medical, dental, disability, life insurance and more to employees of large and mid-sized companies. It’s that diversification, says Jennifer Lynch, a New York-based analyst with BMO Capital Markets, which makes this an attractive buy.

She also likes the company for its international growth profile. It’s recently made more inroads in China and they also do a lot of business in the Pacific Rim. Lynch points out that its non-domestic business is growing earnings by about 20% a year and that should continue going forward.

Another reason to like this company is its exposure to the growing boomer population. In late 2011, Cigna purchased HealthSpring, a company that provides what’s called Medicare Advantage. It’s a program like Medicare, but benefits are handled by a private company, rather than the government.

The purchase gave Cigna 340,000 Medicare Advantage customers in 11 states. The deal also included HealthSpring’s stand-alone Medicare prescription division, which has more than 800,000 customers. Prior to this purchase, the company wasn’t much of a player in the senior health care space. That’s changed. “It gives them more of a critical mass in the growing senior population,” says Lynch.

Analysts are also keen on the company because about 77% of its business is in what’s called “administrative services only” products. That’s a less risky business for insurance companies than traditional group plans. With ASO if an employee exceeds the amount he or she is covered for, the company is on the hook to make up the difference. With the other option, the insurance company is responsible for the additional costs.

Other insurance companies have 50% of their business in ASO products, which means that Cigna is less exposed to those unexpected costs than many of its competitors.

With all of that in mind, Lynch thinks the company will see earnings per share growth of about 7% next year and the business should see good EPS grow thereafter. Cigna, which trades at about 15 times earnings, is also cheaper than some of its peers and it’s less expensive than the S&P 500. The discount, she says, is in large part due to the uncertainty around Obamacare, but she’s not expecting the company to be affected by it too much.

The company is trading at about $68 today, but Lynch has a 12-month price target of $76. Other analysts think it could get well into the $80 range. “It’s a good story,” says Lynch. “There’s a ton of opportunity and they run a clean operation.”

For more investing insights, follow Bryan on Twitter @bborzyko.

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