Health insurers Aetna (Aet) and Cigna (CI) are strong candidates for investment: Both boast annual revenue growth of 8% and Price/Earnings ratios of 19.6 and 17.6 respectively, among the best in the industry. Both companies’ fundamental strength and technical indicators show that these stocks will likely only get more expensive in the future. First, the technicals.
One of my favorite features of Stock Rover is the ability to easily compare a stock to the S&P 500, sector and industry benchmarks. It’s obvious that both stocks have crushed the S&P over the past year, and they’ve also outperformed the health insurance sector as a whole.
But will that trend continue? To find out, let’s look at a simple moving average of Aetna’s and Cigna’s share price over the past 50 and 150 days. The higher the 50 day line is above the 150 day line, the stronger the stock’s upward momentum. For both stocks, we see that the 50 day average has been above the 150 day average for all of the past year. Not only that, the difference has gotten wider over the past couple of months. Share prices aren’t just increasing, they’re increasing at an increasing rate.
Now let’s look at Bollinger Bands, another technical indicator. Bollinger bands map two standard deviations of a stock’s volatility over the past 20 days and they can act as support and resistance. Normally, if a stock is bumping up against the top band, it’s probably due for a decline in the short term. If a stock is bumping against the bottom bound, it’s likely to rebound. This is locally true for both Aetna and Cigna, but look at how they’ve performed with Bollinger bands in the past six months, and in the past one month:
These stocks have spent a lot of time riding the top band. While normally you might want to postpone your buy until the price line moves away from the top band, note that the Bollinger Bands themselves are in a very strong uptrend. These stocks are so strong that they’re pushing the Bollinger Bands significantly higher, and there doesn’t appear to be anything happening with the price action to change that trend anytime soon.
Let’s move on to Relative Strength Indicator (RSI), which measures the magnitude of gains to losses over the preceding 14 days. RSI can oscillate between 0 and 100, and a stock at 70 is generally considered overbought, and a stock at 30 oversold. Over the past six months, RSI has fluctuated between 50 and 70, showing price strength, but without going into overbought territory. RSI is showing these companies to be in strong demand with the investors, but not to the point of being overbought.
One more technical indicator confirms the upward trend for Aetna. Looking at Volume by Price over the past six months helps us identify a support at $106/share. Every time the stock bumped up against $106, it quickly recovered, a sign of strong investor demand at $106. Recently, Aetna broke free of its support level and gained $8/share, and looks like it will likely continue going up from here as there is no resistance point above its current price.
Another metric shows us that these higher prices might be here to stay. When we graph P/E and stock price for both companies over the past five years (below), we see that Aetna’s P/E has been consistently increasing towards a record high in the period. Cigna’s P/E spiked due to some poor earnings in 2013-14 but has also had a similar trend. In both cases, I think strong sales and growth forecasts have made investors more comfortable with a higher P/E, and it wouldn’t surprise me if both stocks had a P/E in the low 20s by year’s end. With the earnings growth both companies are projecting, that leaves lots of room for share price appreciation.
Beneath that impressive price performance are two rapidly growing companies. Aetna, which reported 2014 EPS of $5.72, forecasts $7.20-$7.40 EPS this year. In the most recent earnings call, their CEO said they were “well on track” to reach their goal of $80 billion in operating revenue in 2018. Cigna’s 2014 EPS of $7.88 is projected to be $8.15-8.50. Their CEO has set out a goal to double their size in the next 7 or 8 years and growth their EPS by 10-13% annually. They’re on track if they can keep up their current growth rate. Cigna’s global division is growing faster than the company as a whole, while Aetna’s growth comes more from premium increases than membership expansion.
Both companies also perform near the top of their industry in sales growth, a positive sign for market share. Revenue for health care plans has grown 5.9% over the past year, but that growth for Cigna has been 9.8% and for Aetna 14.2%. Both stocks also have better margins than the industry: Industry operating margin is 6.2%, compared to 7.4% for Aetna and 9.2% for Cigna. Both results are impressive, and signal good things for the future.
Neither company should have their growth impeded by their balance sheet. Both companies have healthy Debt/Equity ratios—0.5 for Aetna and 0.6 for Cigna—and have been increasing their equity. While both companies retain substantial amounts of debt on their books—$7.8 billion for Aetna and $5 billion for Cigna—I trust these companies to manage debt service as they grow.
At both companies, management has used excess capital to reward shareholders. Aetna dished out $87 million on dividends in Q1, or $.50 per share, up from a consistent $0.20-0.22 dividend per share the past few quarters. They also repurchased 2 million shares for $196 million. Cigna has focused more on share repurchases, buying back 4.3 million shares for $515 million so far this year. Management has said that future cash will go primarily toward growth and share repurchases rather than boosting Cigna’s barely-there $0.04 quarterly dividend, which has stayed flat for several quarters. Management at both companies expressed an openness to mergers and acquisitions, though neither has definite plans at present. At both companies, management seems to be striking a strong balance between fueling growth and rewarding shareholders.
I would never recommend buying a stock for the long term on the strength of their share price momentum alone. Fortunately, I don’t have to. Cigna and Aetna are well-run companies experiencing strong growth, and they’re delivering much of that boon to shareholders. I expect the market to recognize this sooner rather than later.