This Health Insurance Company Is Likely A Better Pick Over UnitedHealth Stock

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UnitedHealth Group

We believe that Cigna stock (NYSE: CI) is currently a better pick than UnitedHealth stock (NYSE: UNH), given its better prospects. Although Cigna is trading at a comparatively lower valuation of 0.5x trailing revenues, compared to 1.6x for UnitedHealth, this gap in valuation makes sense, given the latter’s better profitability and lower financial risk. Looking at stock returns, CI stock, with 23% returns this year, has significantly outperformed UNH stock, which is up just 3%. Both the stocks have fared better than the broader indices, with the S&P 500 index falling 17% over this period. There is more to the comparison, and in the sections below, we discuss why we believe CI stock will offer better returns than UNH stock in the next three years. We compare a slew of factors such as historical revenue growth, returns, and valuation multiple in an interactive dashboard analysis of UnitedHealth vs. CignaWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

1. Cigna’s Revenue Growth Over The Recent Years Has Been Stronger

  • Both companies managed to see sales growth over the recent quarters, but UnitedHealth has witnessed comparatively faster revenue growth of 12.7% over the last twelve months, compared to 7.6% for Cigna.
  • However, if we look at a longer time frame, Cigna has fared better. While UnitedHealth’s sales rose at an average annual growth rate of 8.4% to $287.6 billion in 2021, compared to $226.2 billion in 2018, Cigna saw its revenue rise at an average growth rate of 76.2% to $174.1 billion from $48.7 billion over the same period.
  • The sharp rise in Cigna’s revenue can be attributed to its Express Scripts acquisition in Dec 2018.
  • Of late, Cigna is seeing a rise in the pharmacy management business, driven by inflation on branded drugs and higher claim volume. The company has also seen an increase in total medical customers to 17.8 million currently, vs. 17.1 million in 2019, before the pandemic.
  • For UnitedHealth, the revenue growth was partly driven by increased demand for its OptumHealth business, which provides health care through local medical groups. For perspective, OptumHealth’s revenue grew 124% between 2018 and 2021, compared to a 30% rise in revenue for the overall company.
  • The strong growth in the Optum Health business can be attributed to a rise in the number of patients served under the company’s value-based arrangements, including at-home services.
  • UnitedHealth’s total medical enrollments are also on the rise, currently at 51.2 million, compared to 49.2 million in 2019, before the pandemic.
  • Our UnitedHealth Revenue and Cigna Revenue dashboards provide more details on the companies’ segments.
  • Looking forward, Cigna’s revenue is expected to grow faster than UnitedHealth’s over the next three years. The table below summarizes our revenue expectations for the two companies over the next three years. It points to a CAGR of 16.2% for Cigna, compared to a 7.7% CAGR for UnitedHealth, based on Trefis Machine Learning analysis.
  • Note that we have different methodologies for companies negatively impacted by Covid and those not impacted or positively impacted by Covid while forecasting future revenues. For companies negatively affected by Covid, we consider the quarterly revenue recovery trajectory to predict recovery to the pre-Covid revenue run rate. Beyond the recovery point, we apply the average annual growth observed three years before Covid to simulate a return to normal conditions. For companies registering positive revenue growth during Covid, we consider yearly average growth before Covid with a certain weight to growth during Covid and the last twelve months.

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2. UnitedHealth Is More Profitable, And It Offers Lower Risk

  • UnitedHealth’s operating margin of 8.7% over the last twelve-month period is better than 4.5% for Cigna.
  • This compares with 8.8% and 5.5% figures seen in 2019, before the pandemic, respectively.
  • If we look at the recent margin growth, both the companies have seen a decline, but UnitedHealth is slightly better, with the last twelve months vs. last three-year margin change at -0.2%, compared to -1.4% for Cigna.
  • UnitedHealth’s free cash flow margin of 7.5% is also better than 5.4% for Cigna.
  • Our UnitedHealth Operating Income and Cigna Operating Income dashboards have more details.
  • Looking at financial risk, UnitedHealth fares better than Cigna. Its 10.5% debt as a percentage of equity is much lower than 36.9% for Cigna, while its 12.1% cash as a percentage of assets is much higher than 3.4% for Cigna. A better debt position and more cash cushion of UnitedHealth imply a comparatively lower financial risk.

3. The Net of It All

  • We see that UnitedHealth is more profitable than Cigna and offers comparatively lower financial risk. On the other hand, Cigna has seen better revenue growth over recent years, and it is available at a lower valuation than UnitedHealth.
  • Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe Cigna is currently the better choice of the two.
  • The table below summarizes our revenue and return expectation for UnitedHealth and Cigna over the next three years and points to an expected return of 37% for Cigna over this period vs. just 9% expected return for UNH, implying that investors are better off buying CI over UNH, based on Trefis Machine Learning analysis – UnitedHealth vs. Cigna – which also provides more details on how we arrive at these numbers.

While CI stock may outperform UNH, it is helpful to see how UnitedHealth’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

Furthermore, the Covid-19 crisis has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for UnitedHealth vs. Netflix.

What if you’re looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.

Returns Sep 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
UNH Return 0% 3% 225%
CI Return 0% 23% 112%
S&P 500 Return 0% -17% 77%
Trefis Multi-Strategy Portfolio 0% -16% 236%

[1] Month-to-date and year-to-date as of 9/1/2022
[2] Cumulative total returns since the end of 2016

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