Earnings

Comparing Anthem, Inc. (ANTM) and Cigna Corporation (CI)

Anthem, Inc. (NYSE:ANTM) shares are up more than 45.74% this year and recently increased 0.15% or $0.32 to settle at $209.53. Cigna Corporation (NYSE:CI), on the other hand, is up 48.32% year to date as of 11/01/2017. It currently trades at $197.84 and has returned 1.09% during the past week.

Anthem, Inc. (NYSE:ANTM) and Cigna Corporation (NYSE:CI) are the two most active stocks in the Health Care Plans industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.

Growth

The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect ANTM to grow earnings at a 12.63% annual rate over the next 5 years. Comparatively, CI is expected to grow at a 13.99% annual rate. All else equal, CI’s higher growth rate would imply a greater potential for capital appreciation.



Profitability and Returns

Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return., compared to an EBITDA margin of 9.76% for Cigna Corporation (CI). ANTM’s ROI is 7.80% while CI has a ROI of 9.80%. The interpretation is that CI’s business generates a higher return on investment than ANTM’s.

Cash Flow 




The value of a stock is simply the present value of its future free cash flows. ANTM’s free cash flow (“FCF”) per share for the trailing twelve months was +7.51. Comparatively, CI’s free cash flow per share was +2.30. On a percent-of-sales basis, ANTM’s free cash flow was 2.27% while CI converted 1.46% of its revenues into cash flow. This means that, for a given level of sales, ANTM is able to generate more free cash flow for investors.

Financial Risk

ANTM’s debt-to-equity ratio is 0.63 versus a D/E of 0.33 for CI. ANTM is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

ANTM trades at a forward P/E of 16.19, a P/B of 2.10, and a P/S of 0.61, compared to a forward P/E of 17.42, a P/B of 3.46, and a P/S of 1.21 for CI. ANTM is the cheaper of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. ANTM is currently priced at a -5.85% to its one-year price target of 222.56. Comparatively, CI is 0.72% relative to its price target of 196.43. This suggests that ANTM is the better investment over the next year.

The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.10 for ANTM and 1.90 for CI, which implies that analysts are more bullish on the outlook for ANTM.

Risk and Volatility

Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. ANTM has a beta of 0.77 and CI’s beta is 0.48. CI’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. ANTM has a short ratio of 4.06 compared to a short interest of 2.80 for CI. This implies that the market is currently less bearish on the outlook for CI.

Summary

Cigna Corporation (NYSE:CI) beats Anthem, Inc. (NYSE:ANTM) on a total of 7 of the 14 factors compared between the two stocks. CI has higher cash flow per share, is more profitable, generates a higher return on investment and has lower financial risk. In terms of valuation, ANTM is the cheaper of the two stocks on an earnings, book value and sales basis, Finally, CI has better sentiment signals based on short interest.

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