Cigna Group (CI) stock intrinsic value fair value estimate & owner earnings analysis

The Cigna Group has two businesses. Evernorth Health Services runs pharmacy benefit management (Express Scripts, acquired in December 2018), specialty pharmacy and care services. Cigna Healthcare sells employer-funded and insured medical coverage in the United States and health benefits internationally. Revenue has grown from about $154 billion in 2019 to about $275 billion in 2025, but almost all of that increase is drug volume passed through at thin margins, so revenue is a poor guide to value. We look at cash earnings instead. How we measure earnings: we start with operating cash flow, remove swings in receivables, inventories and payables (which move by billions from year to year, for example pharmacy payables rose $8.8 billion in 2024), subtract stock compensation as a real cost (about $290 million a year), and subtract only the maintenance portion of capital spending (about $1.0 to $1.5 billion a year). On that basis earnings were about $7.5 billion in 2019, dipped to $6.0 billion in 2020, and ran $6.8 to $7.1 billion in 2021 to 2023 before stepping up to about $8.6 billion in 2024 and $8.5 billion in 2025. We start the series in 2019 because that is the first full year after the Express Scripts acquisition. About $2.8 billion a year of non-cash amortization and depreciation is added back automatically; because a large part of it relates to acquired customer relationships, we carry the risk of that decay in the fade after year ten and in the bear case rather than lowering today's earnings. Where we start: about $7.1 billion a year, the middle value of 2021 to 2025 (2019 and 2020 excluded because the Express Scripts integration and the pandemic distorted them). We deliberately do not start from the last two years alone, because two years of $8.5 billion is not yet a long enough record to call a new normal. Earnings in 2025 were essentially flat with 2024 (down about 0.3%), so the base case assumes just 1% annual growth, below the roughly 2% a year the business has actually delivered since 2019. We assume no benefit from share buybacks; repurchasing shares at fair prices does not create value. Base case, about $385 per share: earnings of $7.1 billion grow 1% a year for ten years, then fade 3% a year afterward. The reason for crediting ten years is that the three largest pharmacy benefit clients have been renewed or extended through the end of the decade, and earnings have stayed between $6.0 and $8.6 billion in every year since 2019, including 2020. The fade reflects that nothing we can point to secures earnings beyond the current contracts. We credit no gains from the newly announced rebate-free pharmacy model, new products, or share gains. Bear case, about $250 per share: the company says it will incur investment and transition costs for the rebate-free pharmacy benefits model, which it expects to reduce Evernorth profit over the short term, and that Cigna Healthcare will adopt the model for its fully insured customers beginning in 2027. Long-term debt also rose to $30.9 billion at the end of 2025 from $28.9 billion a year earlier, partly to fund the 2025 investment in Shields Health Solutions, so interest costs limit flexibility. We model earnings falling to $5.6 billion (below the 2020 low of $6.0 billion), staying there for three years, drifting down 1% a year through year ten, then fading 5% a year as acquired customer relationships and contracts run off without replacement. Bull case, about $534 per share: earnings hold at the 2024 to 2025 level of about $8.6 billion and grow 2% a year for ten years, matching the pace since 2019, then fade 2% a year. This requires that the step-up seen in the last two years is durable and the rebate-free transition costs prove modest. It does not rely on any market rebound. Our judgement: these values are wide apart because the business depends on a small number of very large client relationships and on how pharmacy pricing rules evolve. The margin-of-safety price of $190 is therefore set well below the bear case, roughly a quarter below the bear value. What could make this wrong: if pharmacy benefit clients or regulators force margins lower than the rebate-free transition implies, or if the 2024 to 2025 earnings step-up proves a timing benefit from working capital rather than lasting profit, the base value would be too high. Conversely, if the higher earnings level holds, the base value is too low. Note that 2026 first-half operating cash flow (about $0.7 billion) is much lower than 2025's full year, but first-half cash flow is seasonally weak and does not by itself change our view.