With a price-to-earnings (or "P/E") ratio of 19.4x The Cigna Group (NYSE:CI) may be sending bearish signals at the moment, given that almost half of all companies in the United States have P/E ratios under 16x and even P/E's lower than 9x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.
Cigna Group has been struggling lately as its earnings have declined faster than most other companies. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
NYSE:CI Price to Earnings Ratio vs Industry March 11th 2024
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How Is Cigna Group's Growth Trending?
In order to justify its P/E ratio, Cigna Group would need to produce impressive growth in excess of the market.
Retrospectively, the last year delivered a frustrating 19% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 24% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
Turning to the outlook, the next three years should generate growth of 19% each year as estimated by the analysts watching the company. With the market only predicted to deliver 11% per year, the company is positioned for a stronger earnings result.
In light of this, it's understandable that Cigna Group's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
The Key Takeaway
We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
We've established that Cigna Group maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.
We don't want to rain on the parade too much, but we did also find 2 warning signs for Cigna Group that you need to be mindful of.
If you're unsure about the strength of Cigna Group's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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