Before the markets opened on Tuesday, July 31, Cigna (CI, Buy) reported second-quarter results that exceeded expectations as a result of continued health care premiums (up 8.2 percent), partly offset by the anticipated weakness in core MCO Operations. Revenue of $8.7 billion was $1.09 billion above our estimate and nearly $1 billion above the Street consensus, while pro forma earnings per ADS of $1.96 were $0.12 above our and the Street expectation of $0.14. We reiterate ‘Buy’ rating on Cigna stock with price target of $105, up previously from $94.
The drop in profitability is not surprise while rose operating pressure MCOs presently encounter and the reduction in profitability of high growth health care membership associates. The operating revenue grew 9.3 percent while total revenue grew by 9% year over year. Operating margin slashed 9 bps to 2.82 percent (while total operating margin dropped 32 bps to 6.11 percent).
Operating margin generated by the company’s core MCO business reduced 52 bps to 6.57 percent while the company gained increased health care costs due to rise of its comparatively less profitable exchange and government program membership division. However, company could control operating expenses in this quarter. In our view, MCOs requires thoroughly control relative cost structure provided anything that mounts stress on operations over the predictable future. Company’s key health care business is nicely positioned for latest Affordable Care Act order which is likely to take over in couple of years.
Management raised its guidance for full-year 2014 with expectations of customer base growth likely to increase by 1-2%. Global healthcare income will range in $1,605 million to $1,635 million while global supplemental benefits to be in between $205 million and $220 million. We expect group disability and life revenue to fall between $315 and $330 million whereas ongoing business should range in $2,125 million to $2,185 million. The consolidated operating income will range in $1,940 million to $2,000 million and earnings will be in between $7.20 and $7.40 per share.