Here’s Why Cigna Is A Better Buy Compared To UnitedHealth Group Stock

UNH: UnitedHealth Group logo
UnitedHealth Group

We think that Cigna (NYSE:CI) currently is a better pick compared to UnitedHealth Group (NYSE:UNH). CI stock trades at about 0.5x trailing revenues, compared to around 1.5x for UnitedHealth. Does this gap in Cigna’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, CI stock has been weighed down over the recent years, partly due to its high levels of debt post the Express Scripts merger in Dec 2018. 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 UnitedHealth Group vs. Cigna: CI stock looks undervalued compared to UNH stock has more details on this. Parts of the analysis are summarized below.

1. Cigna Has Seen Better Revenue Growth

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UnitedHealth’s revenues grew 14% to $257 billion over the last twelve month period, compared to $226 billion in 2018. This can be attributed to increased sales for its Optum Health segment, which provides health care through local medical groups. Our UnitedHealth Group Revenues dashboard summarizes the segment-wise breakup of the company’s revenues. Looking at Cigna, its total revenue surged 3.3x to $160 billion over the last twelve-month period, compared to $49 billion in 2018, primarily due to its Express Scripts acquisition in Dec 2018. Looking forward, now that nearly half of the U.S. population is fully vaccinated for Covid-19, the overall economic activities are likely to move a step closer to normalcy, boding well for these companies.

2. Comparable Margins

Cigna’s operating margins stood at 7.7% over the last twelve month period, reflecting a 70 bps decline from the levels of 8.4% in 2018.  This compares with operating margin of 8.7% over the last twelve month period for UnitedHealth, reflecting a rise of 100 bps from the 7.7% figure seen in 2018. The margins in 2020 were bolstered by a decline in volume of elective surgeries due to the pandemic, resulting in lower medical costs for the health insurance companies.

The Net of It All

Although UnitedHealth’s revenue as well as membership base is much larger than Cigna, the latter has seen higher growth in revenues over the recent years and the operating margins for both the companies are comparable. Looking at the post-Covid recovery, Cigna has fared better in the Q1 2021, with revenues rising at a higher pace 9.1%, compared to 7.5% growth for UnitedHealth. The revenue growth for Cigna was higher sequentially, compared to that for UnitedHealth. Despite this, Cigna has a comparatively lower P/EBIT of 7x, compared to 17x for UnitedHealth. We think this gap in valuation will eventually narrow over time to favor Cigna, which is more attractively priced. As such, we believe that CI is currently a better buying opportunity compared to UNH stock.

While CI may outperform UNH in the near term, 2020 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 Johnson & Johnson vs. UnitedHealth Group.

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