We think that Anthem (NASDAQ:ANTM) currently is a better pick compared to UnitedHealth Group (NYSE:UNH). ANTM stock trades at about 0.8x trailing revenues, compared to around 1.5x for UnitedHealth. Does this gap in Anthem’s valuation make sense? We don’t think so. While both the companies have benefited in the pandemic with an overall increase in Medicaid membership, ANTM stock is being weighed down over its rising operating expenses as well as benefit cost ratio (ratio of medical costs to premiums).
However, there is more to the comparison. Let’s step back to look at the fuller picture of the relative valuation of the two companies by looking at historical revenue growth as well as operating income and operating margin growth. Our dashboard Anthem vs. UnitedHealth Group: ANTM stock looks undervalued compared to UNH stock has more details on this. Parts of the analysis are summarized below.
1. Revenue Growth
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Between 2017 and 2020, Anthem’s revenues grew by about 35%, from around $90 billion to $122 billion, primarily led by the launch of IngenioRx, the company’s pharmacy benefits manager (PBM) in 2019. IngenioRx revenue stood at $22 billion in 2020. Looking at UnitedHealth, total revenue grew 28% from $201 billion in 2017 to $257 billion in 2020.
While all of UnitedHealth’s domestic business segments have seen strong growth over the recent years, OptumHealth stands out with revenues nearly doubling to $39.8 billion in 2020, compared to $20.6 billion in 2017. UnitedHealth’s Optum Health segment, provides care through local medical groups and it has expanded its reach to 98 million people as of 2020, compared to 91 million in 2017.
Our UnitedHealth Group Revenues dashboard summarizes the segment-wise breakup of the company’s revenues. Looking at the last twelve month period, Anthem has seen revenues change by 14.2%, higher than the figure of 6.2% for UnitedHealth.
2. Operating Income
Anthem’s operating income grew 49% from $4.7 billion in 2017 to $7.0 billion in 2020, led by revenue growth as well as a modest expansion of operating margins from 5.2% to 5.8% over the same period. The margin expansion was better through 2019 before it dropped in 2020, owing to a rise in SG&A expenses. Looking at UnitedHealth, the operating income grew 47% from $15.2 billion in 2017 to $22.4 billion in 2020, primarily led by a steady rise in operating margins from 7.6% to 8.7% over the same period. Over the last twelve months, the operating margin for Anthem declined by over 60 basis points, compared to a 60 basis point rise for UnitedHealth.
The Net of It All
Although UnitedHealth’s operating margins compare favorably with Anthem over the recent years, Anthem’s revenue growth has comparatively been higher. Although both the companies are benefiting from increased Medicaid enrollments, especially in 2020, due to the impact of the Covid-19 pandemic, ANTM stock has been weighed down over investors concerns of rising expenses.
Going by consensus estimates, Anthem’s total revenue is expected to grow 12% in 2021, better than the 9% growth expected for UnitedHealth. Now that over half of the U.S. population have received at least one dose of Covid-19 vaccine, the U.S. economy is expected to rebound, which will result in an increase in commercial businesses for both the companies, and also help retain the margins, despite an expected rise in medical costs, given that the volume of elective surgeries is likely to rise.
Now, given that Anthem has seen better revenue growth both in the long run as well as over the last twelve months, and this trend is expected to continue going forward, we think the difference in P/S multiple of 0.8x for Anthem versus 1.5x for UnitedHealth will likely narrow going forward in favor of the less expensive ANTM stock.
While Anthem appears to currently be a better investment than UnitedHealth, it is helpful to see how its peers stack up. Anthem Stock Comparison With Peers summarizes how Anthem compares against peers on metrics that matter. You can find more such useful comparisons on Peer Comparisons.