After An 11% Fall Last Year Is Humana A Better Pick Over UnitedHealth Stock?

UNH: UnitedHealth Group logo
UnitedHealth Group

Given its attractive valuation, we believe that Humana stock (NYSE: HUM) is a better pick than its peer UnitedHealth Group stock (NYSE: UNH). Humana stock trades at 0.6x trailing revenues versus 1.4x for UnitedHealth, partly due to the latter’s superior profitability. 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. In the sections below, we discuss why we believe that HUM will offer better returns than UNH 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. HumanaWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

UNH stock has seen extremely strong gains of 50% from levels of $350 in early January 2021 to around $525 now, while HUM stock has witnessed gains of 10% from levels of $410 to $460 over the same period. This compares with an increase of about 25% for the S&P 500 over this roughly three-year period.

However, the increase in UNH and HUM stocks has been far from consistent. Returns for the UNH stock were 43% in 2021, 6% in 2022, -1% in 2023, while returns for HUM stock were 13% in 2021, 10% in 2022, -11% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that UNH underperformed the S&P in 2023 and HUM underperformed the S&P in 2021 and 2023.

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  3. Which Is A Better Pick – UnitedHealth Stock Or Humana?
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In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for other heavyweights in the Health Care sector, including LLY, JNJ, and ABBV, and even for the mega-cap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index, less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could UNH and HUM face a similar situation as they did in 2023 and underperform the S&P over the next 12 months – or will they see a strong jump? While we expect both stocks to trend higher in the next three years, we think HUM will outperform UNH.

1. Humana’s Revenue Growth Is Better 

  • Humana’s revenue growth has been better, with a 13% average annual growth rate in the last three years, compared to 10% for UnitedHealth.
  • 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 52.8 million, compared to 49.2 million in 2019, before the pandemic.
  • Humana’s top-line growth has been driven by individual Medicare Advantage membership growth and higher per-member medical premiums.
  • The company saw a modest rise in its total medical membership base to 17.0 million currently, compared to 16.7 million in 2019.
  • The Enclara acquisition in 2020 has also bolstered Humana’s top-line growth.
  • Our UnitedHealth Group Revenue Comparison and Humana 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 slightly better than Humana’s, led by continued growth in its Optum business.

2. UnitedHealth Is More Profitable

  • UnitedHealth’s operating margin has improved from 8.1% in 2019 to 8.8% in 2022, while Humana’s operating margin declined from 4.9% to 4.3% over this period.
  • Looking at the last twelve-month period, UnitedHealth’s operating margin of 8.8% fares better than 4.2% for Humana.
  • UnitedHealth is seeing a rise in medical costs with an increase in overall elective procedures. This has impacted its operating margin expansion in the recent past.
  • Our UnitedHealth Group’s Operating Income Comparison and Humana’s Operating Income Comparison dashboards have more details.
  • Looking at financial risk, both are comparable. UnitedHealth’s 14% debt as a percentage of equity is lower than 21% for Humana. However, Humana’s 56% cash as a percentage of assets is higher than 17% for UNH, implying that UnitedHealth has a better debt position and Humana has more cash cushion.

3. The Net of It All

  • We see that Humana has seen better revenue growth and has more cash cushion. On the other hand, UnitedHealth is more profitable and has a better debt position.
  • Now, looking at prospects using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe Humana will offer better returns over UnitedHealth in the next three years.
  • Even if we compare the current valuation multiples to the historical averages, HUM fares better. UnitedHealth’s stock is currently trading at 1.4x revenues, marginally below its last five-year average of 1.5x. In comparison, Humana stock trades at 0.6x revenues, lower than its last five-year average of 0.8x.
  • Our UnitedHealth Group (UNH) Valuation Ratios Comparison and Humana (HUM) 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 15% for UNH over this period vs. a 22% expected return for HUM, based on Trefis Machine Learning analysis – UnitedHealth Group vs. Humana – which also provides more details on how we arrive at these numbers.

While HUM may outperform UNH 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 Jan 2024
MTD [1]
YTD [1]
Total [2]
 UNH Return 0% 0% 229%
 HUM Return 0% 0% 124%
 S&P 500 Return 0% 0% 113%
 Trefis Reinforced Value Portfolio 0% 0% 610%

[1] Month-to-date and year-to-date as of 1/2/2024
[2] Cumulative total returns since the end of 2016

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