That’s why CVS Health Stock is the better pick over its industry rivals

We believe in that CVS Health Stock (NYSE: CVS ) is currently a better pick than its peer Cigna stock (NYSE: CI ), given its relatively lower valuation of 0.4x trailing earnings versus 0.6x for Cigna
CI
. Looking at stock returns, Cigna, with a 45% return so far this year, has outperformed CVS shares, which are down 9%, and both have outperformed the broader S&P500, down 19% over the period. There’s more to the comparison, and in the sections below we discuss why we believe CVS stock will offer better returns than CI stock over the next three years. We compare a range of factors, such as historical revenue growth, returns and valuation, in an interactive dashboard analysis of CVS Health v. Cigna: Which stock is a better bet? Portions of the analysis are summarized below.

1. Cigna’s revenue growth has been better in recent years

  • Both companies managed to see sales growth in recent quarters. Still, CVS’s 10.6% trailing-twelve-month revenue growth is better than Cigna’s 7.2%.
  • However, if we look at a longer time frame, CVS Health’s
    CVS
    sales rose at an average annual growth rate of 15.1% to $292 billion in 2021, compared to $195 billion in 2018, while Cigna’s sales grew at an average rate of 76.2% to $174.1 billion in 2021, up from $48.7 billion in 2018.
  • CVS Health’s revenue growth was helped by Aetna
    AET
    acquisition in 2018, while Cigna’s revenue growth was helped by its acquisition of Express Scripts in December 2018.
  • CVS’s revenue growth since the start of the pandemic has been driven by increased demand for Covid-19 tests and vaccine administration.
  • The company’s health benefits segment saw 18% revenue growth between 2019 and 2021, driven by an increase in total medical membership, which now stands at 24.4 million, compared to 22.9 million in 2019. This trend is expected to continue for years to come given the aging US population.
  • While CVS is expected to see a decline in revenue from Covid-19 testing and vaccine administration, its other businesses, including pharmacy services and health benefits, are expected to grow steadily.
  • For Cigna, higher drug prices due to higher inflation have helped fuel revenue growth in the recent past. The company is also seeing growth in its overall medical customer base, bolstering its top line growth.
  • Earlier this year, Cigna completed the sale of its life, accident and supplemental benefits business in Asia to Chubb for $5.4 billion. It plans to use the proceeds from share buybacks, which have helped the share price rise.
  • Ours CVS Healthcare Revenue Comparison and Cigna Earnings Comparison dashboards provide more detail about the company’s segments.
  • The table below summarizes our revenue expectations for both companies over the next three years and points to a CAGR of 10.7% for CVS, compared to a CAGR of 16.2% for Cigna.
  • Note that we have different methodologies for companies negatively impacted by Covid and those not impacted or positively impacted by Covid while forecasting future earnings. For companies negatively impacted by Covid, we look at the quarterly revenue recovery trajectory to forecast a recovery to pre-Covid revenue levels. Beyond the recovery point, we apply the average annual growth seen three years before Covid to simulate a return to normal conditions. For companies registering positive revenue growth during Covid, we consider the average annual growth before Covid with some weighting against growth during Covid and the last twelve months.

2. Cigna is more profitable

  • CVS’s operating margin of 2.7% in the trailing twelve-month period was lower than Cigna’s 4.3%.
  • This compares with figures of 5.8% and 5.4% seen respectively in 2019 before the pandemic.
  • CVS’s free cash flow margin of 7.0% is better than Cigna’s 5.6%.
  • Ours CVS Healthcare Operating Income Comparison and Cigna Operating Income Comparison dashboards have more details.
  • In terms of financial risk, both are comparable. Although CVS’s 42.2% debt as a percentage of equity is higher than Cigna’s 35.2%, its 8.6% cash as a percentage of assets is better than the latter’s 3.1%. meaning Cigna has a better debt position and CVS has more of a cash cushion.

3. The Web of Everything

  • We see historical revenue growth, profitability and debt position are better for Cigna. On the other hand, CVS has more cash reserves and trades at a relatively lower valuation.
  • Now, looking at the outlook using P/S as a base, due to the wide swings in P/E and P/EBIT, we believe CVS is currently the better choice of the two. We believe the valuation gap between the two companies will narrow in favor of CVS.
  • The table below summarizes our revenue and return expectations for the two companies over the next three years and indicates an expected return of 41% for CVS during this period relative to a 27% expected return on Cigna stock, suggesting investors are better off buying CVS over CI, based on Trefis Machine Learning analysis – CVS Health v. Cigna – which also provides more detail on how we arrive at these numbers.

While CVS stock may outperform CI, it’s useful to see how CVS Health Peers rate on metrics that matter. You will find other valuable comparisons for companies from different industries at Comparative comparisons.

Additionally, the Covid-19 crisis has created many disruptions in pricing that can offer attractive trading opportunities. For example, you’d be surprised how counterintuitive stock valuation is Lowe’s v. Amerco.

With rising inflation and the Fed raising interest rates, among other factors, CVS stock is down 9% this year. Can it fall any further? See how low CVS Health stock can go by comparing its declines in previous market crashes. Here’s a summary of how all stocks have performed in previous market crashes.

What if you’re looking for a more balanced portfolio instead? Ours high quality portfolio and multi-strategy portfolio have consistently beaten the market since late 2016.

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