Market Performance

[Index | % change WoW ]

S&P 500 | 2837 -1.3%
Dow Jones | 23775 -1.9%
Russell 2000 | 1233 +0.3%
Russell Microcap | 455 +1.8%
10-Year | 0.6% -4bps
Gold | 1744 +3%
Oil | 17 -6%
VIX | 36 -5%

Small caps played a bit of catch-up over the past week as the S&P 500 and Dow dropped…

This chart of forward price-to-sales ratios for large, mid, and small-cap indices highlights the growing divergence of these companies over the past few years:

Market Stats

More market fundamentals…

Here are your updated S&P 500 earnings figures (as of 4/17) per FactSet:

Estimates from Yardeni are consistent…

This indicates a 12-13% decline in EPS for the S&P 500 from $163 in 2019 to $143 in 2020 (obviously subject to change as companies have been releasing earnings)…

With the S&P 500 at 2837 this gives it a 19.8x PE on those 2020 estimates.

Not much of a bargain… An estimated 21% rebound in 2021 to $173 might be a stretch as well.

The old adage that stock prices follow earnings makes things even more confusing as the 2 have diverged as of late…

Don’t forget that “our” ability to forecast earnings isn’t great either… Downward revisions are the rule, not the exception…

The long-term average PE ratio for the S&P 500 is about 16x, so:

• At $143 EPS = 2288

• At $173 EPS = 2768

We breifly touched the low point on 3/23/20 when the S&P hit 2237… These ranges don’t seem far-fetched…

Quick Value

Cigna Corp ($CI)

Cigna is a commercial health insurer and Medicare provider. More recently, in 2018, they acquired their way into the pharmacy benefits management (PBM) business via Express Scripts.

There are 372m shares x $188 stock price = $70bn market cap. Net debt is about $33bn for a $103bn enterprise value.

Cigna generated $9.5bn in cash flow and spent $1bn on capex in 2019 for $8.5bn in free cash flow. Management projects another $7bn in FCF on average for each of 2020-2021. Call it 10x price to free cash flow.

For comparison, CVS Health ($CVS), is probably the closest rival after they acquired health insurer Aetna in 2018. This makes CVS a combination of health insurance, PBM, and retail drug stores. CVS has an $81bn market cap and guided to $8-8.5bn in free cash flow for 2020.

This gives both Cigna and CVS a similar 10x FCF multiple.

However, they differ in a few ways that make Cigna appealing:

• CVS carries 2x the debt load at $60bn+ or 7x debt/FCF while Cigna’s balance sheet is less full at $33bn net debt or 4.7x debt/FCF…

• Cigna pays only a token dividend (< $200m) while CVS is committed to $2.6bn in dividend payments each year — this will make it much harder for CVS to quickly reduce debt levels

• Cigna is very close to reaching it’s debt target (likely coming in 2020) and has virtually no fixed cash commitments in dividends or buybacks — this leaves room for the company to fully utilize its $7bn in FCF to benefit shareholders… in fact, they could buy back ~10% of the company each year at that pace…

So there you have it, a relatively clean balance sheet with cash flow fully available for the benefit of shareholders… The company is targeting 10%+ earnings growth while trading right around 10x earnings today…