Should You Pick UnitedHealth Stock Over Walmart For Better Returns?

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UNH: UnitedHealth Group logo
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UnitedHealth Group

We believe that UnitedHealth Group stock (NYSE: UNH) is a better pick than the retailer giant Walmart stock (NYSE: WMT), given its better prospects. Although these companies are from different sectors, we compare them because they have a similar market capitalization of around $440 billion and both are part of the Dow 30 index.

The decision to invest often comes down to finding the best stocks within the parameters of certain characteristics that suit an investment style. The size of profits can matter, as larger profits can imply greater market power. Since these stocks are from different sectors, comparing P/S against one another may not be helpful. We compare their current multiples with the historical ones in the sections below to better gauge their valuations.

Interestingly, UNH has had a Sharpe Ratio of 0.8 since early 2017, while the figure stood at 0.7 for WMT, both faring better than the S&P 500 Index with the Sharpe Ratio of 0.6 over the same period. This compares with the Sharpe of 1.3 for the Trefis Reinforced Value portfolio. Sharpe is a measure of return per unit of risk, and high-performance portfolios can provide the best of both worlds.

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Looking at stock returns, UNH has underperformed vis-à-vis broader markets amid rising medical costs. While UNH is down 9% this year, WMT is up 15%, and the S&P500 index is up 16%. There is more to the comparison, and in the sections below, we discuss why we believe that UNH will offer better returns over WMT 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 Group vs. WalmartWhich 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 5.3% for Walmart.
  • 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.
  • Walmart’s revenue growth over the recent past is driven by increased consumer spending on groceries and other necessities.
  • Walmart’s wide offering and focus on cost-conscious shopping has bolstered its sales in a high inflationary environment.
  • If we look at the last twelve-month period revenues, UnitedHealth fares better with sales growth of 13.7% vs. 8.0% for Walmart.
  • Our UnitedHealth Group Revenue Comparison and Walmart Revenue Comparison dashboards provide more insight into the companies’ sales.
  • Looking forward, UnitedHealth’s revenue growth over the next three years is expected to be better than Walmart’s. The table below summarizes our revenue expectations for the two companies over the next three years. It points to a CAGR of 7.8% for UnitedHealth, compared to a 2.3% CAGR for Walmart, based on Trefis Machine Learning analysis.
  • Note that we have different methodologies for companies that are negatively impacted by Covid and those that are 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 forecast 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. UnitedHealth Is More Profitable

  • UnitedHealth’s operating margin has improved from 8.1% in 2019 to 8.8% in 2022, while Walmart’s operating margin declined from 4.2% to 3.0% over this period.
  • Looking at the last twelve-month period, UnitedHealth’s operating margin of 8.8% fares better than 3.5% for Walmart.
  • UnitedHealth is seeing a rise in medical costs as more people are getting elective procedures that were earlier postponed during the pandemic. This has impacted its operating margin expansion in the recent past.
  • Walmart focused on reducing its excess inventory by marking it down, and this has hurt its profit margins over the last year or so. Furthermore, given the high inflationary environment, people are spending more on necessities rather than big purchases such as televisions and furniture, which usually carry higher margins for the retailers.
  • Our UnitedHealth Group’s Operating Income Comparison and Walmart Operating Income Comparison dashboards have more details.
  • Looking at financial risk, both are comparable. UnitedHealth’s 15% debt as a percentage of equity is higher than 10% for Walmart. But, its 17% cash as a percentage of assets is higher than 4% for the latter, implying that Walmart has a better debt position but UnitedHealth has more cash cushion.

3. The Net of It All

  • We see that UnitedHealth has seen better revenue growth, is more profitable, and has a better debt position. This also explains its higher valuation multiple of 1,3x revenues compared to 0.7x for Walmart.
  • Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe UnitedHealth will offer better returns over Walmart in the next three years.
  • Even if we compare the current valuation multiples to the historical averages, UNH fares better. UnitedHealth’s stock is currently trading at 1.3x revenues, marginally below its last five-year average of 1.4x. In comparison, Walmart’s stock trades at 0.7x revenues marginally higher than its last five-year average of 0.6x.
  • Our UnitedHealth Group (UNH) Valuation Ratios Comparison and Walmart (WMT) Valuation Ratios Comparison have more details.
  • The table below summarizes our revenue and return expectations for both companies over the next three years and points to an expected return of 19% for UNH over this period vs. a -1% expected return for WMT, based on Trefis Machine Learning analysis – UnitedHealth Group vs. Walmart – which also provides more details on how we arrive at these numbers.

While UNH may outperform WMT in the next three years, it is helpful to see how UnitedHealth Group’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

Returns Sep 2023
MTD [1]
2023
YTD [1]
2017-23
Total [2]
 UNH Return 1% -9% 202%
 WMT Return 1% 15% 136%
 S&P 500 Return -1% 16% 99%
 Trefis Reinforced Value Portfolio -3% 27% 554%

[1] Month-to-date and year-to-date as of 9/20/2023
[2] Cumulative total returns since the end of 2016

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