We believe that UnitedHealth stock (NYSE: UNH) and Humana stock (NYSE: HUM), in the healthcare plans industry, will likely give similar returns over the next three years. Although UnitedHealth is trading at a higher valuation of 1.6x trailing revenues, compared to 0.7x for Humana, this gap in the valuation is largely justified, given UnitedHealth’s superior profitability, as discussed below.
If we look at stock returns, HUM stock, with 10% returns in 2022, outperformed UNH stock, up 6%, and the broader S&P 500 index, down 20%. There is more to the comparison, and in the sections below, we discuss the possible returns from these stocks in the next three years. We compare a slew of factors, such as historical revenue growth, returns, and valuation, in an interactive dashboard analysis of UnitedHealth vs. Humana: Both Seem Similar Bets. Parts of the analysis are summarized below.
1. Humana’s Revenue Growth Has Been Better In Recent Years
- Both companies saw similar sales growth of 12.8% over the last twelve months.
- However, if we look at a longer time frame, Humana 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, Humana saw its revenue rise at an average growth rate of 13.5% to $83.1 billion from $56.9 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.
- Humana’s top-line growth has been driven by a steady rise in its retail membership base to 10.1 million currently, compared to 9.2 million in 2017.
- The company faced challenges in retaining its clientele with higher than anticipated terminations during the 2022 enrollment window. However, the company likely saw a rebound in the 2023 enrollment window.
- Our UnitedHealth Revenue and Humana Revenue dashboards provide more details on the companies’ segments.
- Looking forward, UnitedHealth’s revenue is expected to grow faster than Humana’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 7.7% for UnitedHealth, compared to a 5.9% CAGR for Humana, 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
- UnitedHealth’s operating margin of 9.2% over the last twelve-month period is much better than 4.8% for Humana.
- This compares with 8.8% and 5.3% figures seen in 2019, before the pandemic, respectively.
- If we look at the recent margin growth, Humana has seen a modest 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 -0.7% for Humana.
- UnitedHealth’s free cash flow margin of 10.8% aligns with the 10.5% figure for Humana.
- Our UnitedHealth Operating Income and Humana Operating Income dashboards have more details.
- Looking at financial risk, both are comparable. UnitedHealth’s 9.8% debt as a percentage of equity is lower than 16.4% for Humana, while its 17.5% cash as a percentage of assets is lower than 53.3% for the latter, implying that UnitedHealth has a better debt position while Humana has more cash cushion.
3. The Net of It All
- We see that UnitedHealth is more profitable than Humana and has a better debt position. On the other hand, Humana has seen better revenue growth over recent years, has more cash cushion, and 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 both stocks are likely to offer similar returns.
- The table below summarizes our revenue and return expectations for UnitedHealth and Humana over the next three years and points to an expected return of 11% for UnitedHealth over this period vs. a 15% expected return for Humana, implying that both stocks will likely offer similar returns over the next three years, based on Trefis Machine Learning analysis – UnitedHealth vs. Humana – which also provides more details on how we arrive at these numbers.
While HUM and UNH stock may offer similar returns over the next three years, 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||0%||0%||71%|
|Trefis Multi-Strategy Portfolio||0%||0%||215%|
 Month-to-date and year-to-date as of 1/2/2023
 Cumulative total returns since the end of 2016