Financial Relative Management Evaluation Project of Stocks

Submitted by: Michael Gu, Niraj Chaudhary, Sarah Court, Talha Ibrahim & Vrinda Manektala (FM1)
September 17, 2012

Summary of Companies:
We have selected the US Health Care Insurance sector as our area of focus. In particular we have chosen Cigna Corp (NYSE: CI), a major US health care insurance services provider with a market cap of $13.64b, for valuation as our main stock. For the purpose of conducting a fair relative stock valuation of Cigna Inc, we chose the following four competitors based on their similarity in terms of line of business and market capitalization to Cigna Corp (exhibit 1):

Humana Inc. (NYSE: HUM)

It is a health care insurance company in the United States with a market cap of $11.2b. It provides health care insurance plans mainly within the United States and Puerto Rico, but also does business in Western Europe and Asia.

Aetna Inc. (NYSE: AET)

It is also a US healthcare insurance service provider with a number of healthcare insurance product offerings. The company has a market cap of almost $13billion.

Well Point Inc. (NYSE: WLP)

It is a health benefits company in the United States with a market cap of $18.92Billion. The company, like the rest of our chosen competitors, specializes in hybrid health insurance plans for individuals and groups.

Coventry Health Care (NYSE: CVH)

It is a health insurance company in the United States that offers various products such as insurance, health plans and worker's compensation with a market cap of $5.53Billion.

Rationale behind the choice of competitors:

In case of our chosen health care plans sector, we found a total of 14 major public listed companies in the US Stock Markets. The market capitalization varied from $375 million to $55 billion. Hence we decided to choose the mid-tier health care service plan providers. Yet

the difference between our smallest chosen competitor (CVH) and the largest (WLP) is sizeable in terms of market capitalization. While the former does not compete with the latter due the sheer difference in size, they are close competitors with our chosen stock CIGNA Corp. Additionally we also had to rule out smaller cap firms in the list of 14 public listed companies as some of them reported negative earnings and P/E ratios.

Relative Valuation Methods:

In order to find the intrinsic value of Cigna Corp the following ratios were used to determine the value of our stock. 1. Price/ Sales ratio 2. Price/ Book Value ratio 3. Trailing Twelve Month Price/Earnings ratio

Value of Cigna Corp Using Price/Sales Ratio:

Using Price/ Sales ratio, we derived the intrinsic stock value of Cigna Corp. By taking the average of P/S of the other four competitors of Cigna Corp, we multiplied the result with the sales per share of Cigna Corp to find out the intrinsic value of $31.35. This value is based on the sales revenue of trailing twelve-month period till 30 June 2012. Considering that Cigna Corp is currently trading at $47.8, as on 15th Sep 2012, the intrinsic value of stock is 35% below the market price, which means that the share is overvalued in the market. However, a limiting factor in using Price/Sales ratio is that it uses past sales data and does not take into account the earnings of the company. Hence companies with lower sales and better profit margins suffer from a lower valuation.

Value of Cigna Corp using Price/ Book Value

Using price-to-book-value ratio, we found the intrinsic value of Cignas share to be $36 (exhibit 2), which makes Cigna at the current price of $47.8 (exhibit 2) an overvalued stock. This method uses historical data rather than future potential earning, so in many cases it

doesnt reflect true value. Using P/B ratio to evaluate the prices of insurance companies is also not fully reliable as they have fewer assets such as plants and machinery as in the case of manufacturing industry. However in this case, we think that this valuation is pointing in right direction though not by the same margin as given by this evaluation method. Given the uncertainty regarding healthcare regulations about to be introduced and history of Cigna missing three analyst predictions in last four quarter, the stock is overvalued.

Value of Share Using Trailing P/E Ratio

Recommendation
When we look at the ratios, Cigna stock appears to be overvalued in the market. Thus our recommendation would be to sell the stock.