Financial Relative Management Evaluation Project of Stocks

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

like the rest of our chosen competitors.64b. In particular we have chosen Cigna Corp (NYSE: CI). (NYSE: WLP) It is a health benefits company in the United States with a market cap of $18. It provides health care insurance plans mainly within the United States and Puerto Rico. (NYSE: HUM) It is a health care insurance company in the United States with a market cap of $11. but also does business in Western Europe and Asia.Summary of Companies: We have selected the US Health Care Insurance sector as our area of focus. Aetna 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. we found a total of 14 major public listed companies in the US Stock Markets. Well Point Inc. Rationale behind the choice of competitors: In case of our chosen health care plans sector. Yet .92Billion. The company.2b. The company has a market cap of almost $13billion. health plans and worker's compensation with a market cap of $5. For the purpose of conducting a fair relative stock valuation of Cigna Inc. 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. The market capitalization varied from $375 million to $55 billion. (NYSE: AET) It is also a US healthcare insurance service provider with a number of healthcare insurance product offerings.53Billion. a major US health care insurance services provider with a market cap of $13. for valuation as our main stock. Hence we decided to choose the mid-tier health care service plan providers.

we multiplied the result with the sales per share of Cigna Corp to find out the intrinsic value of $31. we found the intrinsic value of Cigna’s share to be $36 (exhibit 2).8. which means that the share is overvalued in the market.8 (exhibit 2) an overvalued stock. However. Price/ Sales ratio 2. This method uses historical data rather than future potential earning. Price/ Book Value ratio 3. Value of Cigna Corp using Price/ Book Value Using price-to-book-value ratio. the intrinsic value of stock is 35% below the market price. While the former does not compete with the latter due the sheer difference in size. This value is based on the sales revenue of trailing twelve-month period till 30 June 2012. 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. Considering that Cigna Corp is currently trading at $47. so in many cases it . as on 15th Sep 2012. they are close competitors with our chosen stock CIGNA Corp. Trailing Twelve Month Price/Earnings ratio Value of Cigna Corp Using Price/Sales Ratio: Using Price/ Sales ratio. which makes Cigna at the current price of $47. 1. 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. 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.the difference between our smallest chosen competitor (CVH) and the largest (WLP) is sizeable in terms of market capitalization. Hence companies with lower sales and better profit margins suffer from a lower valuation. By taking the average of P/S of the other four competitors of Cigna Corp. we derived the intrinsic stock value of Cigna Corp.35.

Thus our recommendation would be to sell the stock. Cigna stock appears to be overvalued in the market. we think that this valuation is pointing in right direction though not by the same margin as given by this evaluation method. Value of Share Using Trailing P/E Ratio Recommendation When we look at the ratios.doesn’t 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. . 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.

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