We believe that CVS Health stock (NYSE: CVS) is currently a better pick than UnitedHealth stock (NYSE: UNH), given its better prospects. Although CVS is trading at a comparatively lower valuation of 0.4x trailing revenues, compared to 1.5x for UnitedHealth, this gap in valuation, to some extent, makes sense, given the latter’s better profitability and lower financial risk.
Looking at stock returns, UNH stock, with 2% returns this year, has outperformed CVS stock, down 6%. Both the stocks have fared much 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 CVS 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. CVS Health: Which Stock Is A Better Bet? Parts of the analysis are summarized below.
1. CVS’ Revenue Growth Has Been Better In Recent Years
- Both companies managed to see sales growth over the recent quarters, but UnitedHealth has witnessed comparatively faster revenue growth of 12.8% over the last twelve months, compared to 10.6% for CVS.
- However, if we look at a longer time frame, CVS 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, CVS saw its revenue rise at an average growth rate of 15.1% to $292.1 billion from $194.6 billion over the same period.
- UnitedHealth’s revenue growth was primarily driven by the 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 51.3 million, compared to 49.2 million in 2019, before the pandemic.
- CVS Health’s revenue growth has been aided by its Aetna acquisition in 2018 and later by increased demand for Covid-19 testing and vaccine administration since the beginning of the pandemic.
- The company’s healthcare benefits segment has seen an 18% rise in revenue between 2019 and 2021, led by a rise in total medical membership, which currently stands at 24.3 million, compared to 22.9 million in 2019.
- Our UnitedHealth Revenue and CVS Health Revenue dashboards provide more details on the companies’ segments.
- Looking forward, CVS’ 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 10.7% for CVS, 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 9.2% over the last twelve-month period is much better than 2.7% for CVS.
- This compares with 8.8% and 5.8% figures seen in 2019, before the pandemic, respectively.
- If we look at the recent margin growth, CVS has seen a decline, but UnitedHealth has seen its margin expand slightly, with the last twelve months vs. last three-year margin change at 0.1%, compared to -2.9% for CVS.
- UnitedHealth’s free cash flow margin of 10.8% is also better than 7.0% for CVS.
- Our UnitedHealth Operating Income and CVS Health Operating Income dashboards have more details.
- Looking at financial risk, UnitedHealth fares better than CVS. Its 10.1% debt as a percentage of equity is much lower than 40.9% for CVS, while its 17.5% cash as a percentage of assets is much higher than 8.6% for CVS. A better debt position and more cash cushion for UnitedHealth imply a comparatively lower financial risk.
3. The Net of It All
- We see that UnitedHealth is more profitable than CVS and offers comparatively lower financial risk. On the other hand, CVS 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 CVS is currently the better choice of the two.
- The table below summarizes our revenue and return expectation for UnitedHealth and CVS over the next three years and points to an expected return of 30% for CVS over this period vs. just an 11% expected return for UNH, implying that investors are better off buying CVS over UNH, based on Trefis Machine Learning analysis – UnitedHealth vs. CVS Health – which also provides more details on how we arrive at these numbers.
While CVS 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.
|S&P 500 Return||2%||-17%||77%|
|Trefis Multi-Strategy Portfolio||5%||-18%||223%|
 Month-to-date and year-to-date as of 11/15/2022
 Cumulative total returns since the end of 2016