CVS Health Corporation (NYSE:CVS) shares are down more than -10.01% this year and recently decreased -0.35% or -$0.25 to settle at $70.76. Cigna Corporation (NYSE:CI), on the other hand, is up 53.02% year to date as of 12/05/2017. It currently trades at $204.60 and has returned 1.78% during the past week.
CVS Health Corporation (NYSE:CVS) and Cigna Corporation (NYSE:CI) are the two most active stocks in the Health Care Plans industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect CVS to grow earnings at a 6.95% annual rate over the next 5 years. Comparatively, CI is expected to grow at a 14.11% annual rate. All else equal, CI’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this., compared to an EBITDA margin of 9.82% for Cigna Corporation (CI). CVS’s ROI is 9.90% while CI has a ROI of 9.80%. The interpretation is that CVS’s business generates a higher return on investment than CI’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. CVS’s free cash flow (“FCF”) per share for the trailing twelve months was +1.55. Comparatively, CI’s free cash flow per share was +4.30. On a percent-of-sales basis, CVS’s free cash flow was 0.88% while CI converted 2.67% of its revenues into cash flow. This means that, for a given level of sales, CI is able to generate more free cash flow for investors.
Liquidity and Financial Risk
CVS’s debt-to-equity ratio is 0.74 versus a D/E of 0.38 for CI. CVS is therefore the more solvent of the two companies, and has lower financial risk.
CVS trades at a forward P/E of 11.18, a P/B of 2.07, and a P/S of 0.40, compared to a forward P/E of 17.83, a P/B of 3.60, and a P/S of 1.24 for CI. CVS 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
When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. CVS is currently priced at a -16.26% to its one-year price target of 84.50. Comparatively, CI is -5.74% relative to its price target of 217.06. This suggests that CVS 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 2.20 for CVS and 1.90 for CI, which implies that analysts are more bullish on the outlook for CVS.
Risk and Volatility
No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. CVS has a beta of 0.87 and CI’s beta is 0.49. CI’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. CVS has a short ratio of 2.98 compared to a short interest of 2.36 for CI. This implies that the market is currently less bearish on the outlook for CI.
Cigna Corporation (NYSE:CI) beats CVS Health Corporation (NYSE:CVS) on a total of 8 of the 14 factors compared between the two stocks. CI generates a higher return on investment, is more profitable, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, CVS 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.