Is UnitedHealth Stock A Better Pick Over This Healthcare Facility Company?

We believe that UnitedHealth stock (NYSE: UNH) is a better pick than HCA stock (NYSE: HCA), a healthcare facilities operator, given its better prospects. Although UNH is trading at a comparatively higher valuation of 1.4x trailing revenues, compared to 1.1x for HCA, this gap in valuation makes sense, given the former’s better revenue growth and financial position. Looking at stock returns, UNH stock, with -2% returns in the last twelve months, has fared better than HCA stock, down 6%, and the broader S&P 500 index, down 10%. There is more to the comparison, and in the sections below, we discuss why we believe UNH stock will offer better returns than HCA stock 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. HCA: Which Stock Is A Better Bet? Parts of the analysis are summarized below.

1. UnitedHealth’s Revenue Growth Is Better

• 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 2.7% for HCA.
• Even if we look at a longer time frame, UnitedHealth has fared better. While UnitedHealth’s sales rose at an average annual growth rate of 10.2% to $324 billion in 2022, compared to $242 billion in 2019, HCA saw its revenue rise at an average growth rate of 5.6% to $60 billion from $51 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 135% between 2019 and 2022, compared to a 34% 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 51.7 million, compared to 49.2 million in 2019, before the pandemic.
• For HCA Healthcare, the revenue growth over the recent past is driven by a rise in total admissions and revenue per admission.
• Equivalent admissions grew 6.8% y-o-y in 2021 and 2.1% in 2022 after seeing a 9.2% fall in 2020 due to the impact of the pandemic.
• Revenue per equivalent admission grew 10.5% in 2020, 6.8% in 2021, and 0.4% in 2022. The company will likely see a low single-digit rise in both metrics in the near term.
• Our UnitedHealth Revenue Comparison and HCA Revenue Comparison dashboards provide more revenue details.
• Looking forward, UnitedHealth’s revenue is expected to grow faster than HCA’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 8% for UnitedHealth, compared to a 5% CAGR for HCA, 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.

2. HCA Is More Profitable, But It Comes At Higher Risk

• UnitedHealth’s operating margin of 9.4% over the last twelve-month period is much lower than 20.0% for HCA.
• This compares with 8.8% and 17.3% figures in 2019, before the pandemic, respectively.
• If we look at the recent margin growth, both have seen their margin expand slightly, with the last twelve months vs. last three-year margin change at 0.2% for UnitedHealth, compared to 0.4% for HCA.
• UnitedHealth’s free cash flow margin of 8,1% is also lower than 14.1% for HCA.
• Our UnitedHealth Operating Income Comparison and HCA Operating Income Comparison dashboards have more details.
• Looking at financial risk, UnitedHealth fares better than HCA. Its 13% debt as a percentage of equity is much lower than 55% for HCA, while its 11% cash as a percentage of assets is much higher than 2% for HCA. 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 has seen better revenue growth, has a better debt position, and has more cash cushion. On the other hand, HCA is more profitable and 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 UnitedHealth is currently the better choice of the two.
• The table below summarizes our revenue and return expectation for UnitedHealth and HCA over the next three years and points to an expected return of 18% for UNH over this period vs. just a 2% expected return for HCA, implying that investors are better off buying UNH over HCA, based on Trefis Machine Learning analysis – UnitedHealth vs. HCA – which also provides more details on how we arrive at these numbers.

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.

[1] Month-to-date and year-to-date as of 3/2/2023
[2] Cumulative total returns since the end of 2016

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