At Current Levels of $60 Is CVS Health Cheaper Than UnitedHealth Group?

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UnitedHealth Group

The health insurance companies have not seen any significant impact of the current coronavirus crisis, and they have fared much better than the broader markets. While UnitedHealth Group (NYSE:UNH) has seen 6.8% growth since early February, after the WHO declared the coronavirus a global health emergency, CVS Health’s (NYSE:CVS) stock has declined -9.8% over the same period. Looking at historical fundamentals, UnitedHealth has fared better than CVS Health, though in terms of valuation, UnitedHealth’s P/E multiple is rich compared to CVS Health even at the current market price. We believe that UnitedHealth’s better performance could partly be priced in by the market, while there appears to be a buying opportunity in CVS, as its P/E multiple has contracted while the impact on revenue and earnings in the near term is unlikely to be significant, in our view. In our detailed dashboard analysis, ‘Is UnitedHealth Group Expensive Or Cheap vs. CVS Health?‘, we compare trends in key metrics for the two healthcare companies to determine their relative valuations under the current circumstances. We summarize parts of this analysis below.

Why Has UnitedHealth Outperformed CVS Health Over Recent Weeks?

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UnitedHealth posted a strong Q1 last month, and it reaffirmed its guidance for the full year. The company benefited from higher medicaid enrollments, though its medical costs increased, due to the impact of COVID-19. CVS Health, on the other hand, will report its earnings this week, and it could see a jump in sales owing to two factors, 1. higher medicaid enrollments, and 2. higher pharma, retail, and OTC products sales due to stocking up of drugs and consumer healthcare products in March.

UnitedHealth’s current P/E multiple, based on 2019 earnings, has declined slightly from 19.4x in 2019 to 19.0x currently, while CVS’ multiple has declined from 10.7x to about 8.5x. CVS’ current multiple is much lower compared to its own historical figures, and much lower compared to UnitedHealth. CVS’ P/E is about 28% lower than the 11.8x multiple it traded at in 2018. As such, there appears to be a buying opportunity in CVS’ stock at the current levels, unless the earnings reported and guidance is below the street estimates.

CORONAVIRUS CRISIS : Since early February, UnitedHealth Group stock has increased 6.8% compared to -9.8% for CVS Health.

  • UnitedHealth’s stock grew 6.8% since early February, compared to -9.8% decline for CVS Health, after the WHO declared a global health emergency relating to coronavirus.
  • UnitedHealth’s stock surged 19.3%, while CVS Health’s stock jumped 12.8% since the March 23 lows seen in the broader markets, after the government’s $2 trillion economic package.

HISTORICAL PERFORMANCE: From 2009-2019 UnitedHealth Group stock has grown at 5.8x the rate of CVS Health

  • UnitedHealth Group stock went from $25.99 at the end of 2009 to $292.71 at the end of 2019, representing a change of 1026.2%.
  • During the same time period, CVS Health went from $26.37 to $73.18 representing a change of 177.5%.
  • This implies that UnitedHealth Group stock grew at 5.8x the rate of CVS Health.

ANALYSIS: Is UnitedHealth Group stock expensive based on a review of the fundamentals?

  • P/E Ratio: Based on trailing 2019 P/E ratios, UNH stock looks expensive compared to prior years and expensive compared to CVS Health. UnitedHealth Group 2019 trailing P/E ratio of 19.4x is 1.8x that of the 2019 CVS Health P/E ratio of 10.7x. P/E Ratio is calculated based on year end market price and trailing adjusted earnings. However, for 2020 P/E, we use 2019 adjusted earnings and current market price.
  • Historical Revenue Growth: UnitedHealth Group has seen slower revenue growth compared to CVS Health, though CVS Health’s revenue jump in 2018 and 2019 can be attributed to the Aetna acquisition. UnitedHealth Group 2014-19 annualized revenue growth of 13.2% is 0.6x that of the 2014-19 CVS Health’s annualized revenue growth rate of 23.8%.
  • Historical EPS Growth: UnitedHealth Group has seen much stronger EPS growth compared to CVS Health. UnitedHealth Group 2014-19 annualized adjusted EPS growth of 20.1% is 1.8x that of the 2014-19 CVS Health annualized EPS growth rate of 10.8%.
  • Total Debt Comparisons: UnitedHealth Group Total Debt has increased from $33 billion to $41 between 2016 and 2019. In comparison, Total Debt for CVS Health has risen from $27 billion to $68 billion.

CVS also appears to be a better bet compared to Kroger.

Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. Additionally, the complete set of coronavirus impact and timing analyses is available here.

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