We believe that Cigna stock (NYSE: CI) is a better pick than its industry peer, UnitedHealth stock (NYSE: UNH), given its better prospects. Although UnitedHealth stock trades at a higher valuation of 1.4x trailing revenues than 0.4x for Cigna, this valuation gap makes sense given the former’s superior revenue growth and profitability. Looking at stock returns, both have underperformed vis-à-vis broader markets amid concerns about 2024 Medicare Advantage rates, which have weighed on health insurance stocks at large. While UNH is down 6% this year, CI is down 22%, and the S&P500 index is up 12%. There is more to the comparison, and in the sections below, we discuss why we believe CI stock will offer higher returns than UNH 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. Cigna: Which Stock Is A Better Bet? Parts of the analysis are summarized below.
1. UnitedHealth’s Revenue Growth Is Better
- UnitedHealth’s revenue growth has been better, with a 10.2% average annual growth rate in the last three years, compared to 5.6% for Cigna.
- 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 Cigna, increased drug prices due to higher inflation have aided revenue growth. The company is also seeing a rise in its total medical customer base, bolstering its top-line growth.
- Even if we look at the last twelve-month period, UnitedHealth fares better with sales growth of 12.9% vs. 4.7% for Cigna.
- Our UnitedHealth Revenue Comparison and Cigna Revenue Comparison dashboards provide more insight into the companies’ sales.
- Looking forward, Cigna’s sales are expected to see strong growth in 2024, primarily due to the pharmacy benefits management for 20 million Centene customers under its agreement with Centene last year.
- Cigna should also benefit from a rise in its Medicare Advantage star ratings last year.
- UnitedHealth is expected to see a steady rise in its Optum business, with a continued uptick in its total customer base.
- 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 16.2% CAGR for Cigna, 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 rose slightly from 8.1% in 2019 to 8.8% in 2022, while Cigna’s operating margin saw a marginal decline from 5.4% to 5.3% over this period.
- Looking at the last twelve-month period, UnitedHealth’s operating margin of 8.8% fares better than 4.8% for Cigna.
- Our UnitedHealth Operating Income Comparison and Cigna Operating Income Comparison dashboards have more details.
- UnitedHealth’s free cash flow margin of 11.1% is higher than 4.7% for Cigna.
- Looking at financial risk, both are comparable. While UnitedHealth’s 15.2% debt as a percentage of equity is lower than 41.5% for Cigna, the latter’s 3.5% cash as a percentage of assets is higher than 1.6% for UNH. This means that UnitedHealth has a better debt position, but Cigna has more cash cushion.
3. The Net of It All
- We see that UnitedHealth has demonstrated better revenue growth, is more profitable, and has a better debt position. On the other hand, Cigna is trading at a comparatively lower valuation multiple and has more cash cushion.
- Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe Cigna is the better choice of the two, primarily because of its lower valuation and better expected top-line growth.
- Even if we compare the current valuation multiples to the historical averages, Cigna fares better, with its stock currently trading at 0.4x trailing revenues vs. the last four-year average of 0.6x. In contrast, UnitedHealth stock trades at 1.4x trailing revenues vs. the last four-year average of 1.5x.
- Our UnitedHealth (UNH) Valuation Ratios Comparison and Cigna (CI) Valuation Ratios Comparison have more details.
- The table below summarizes our revenue and return expectations for UnitedHealth and Cigna over the next three years and points to an expected return of 15% for UNH over this period vs. a 53% expected return for Cigna, 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.
|S&P 500 Return||2%||12%||91%|
|Trefis Multi-Strategy Portfolio||3%||13%||256%|
 Month-to-date and year-to-date as of 6/5/2023