We think that UnitedHealth stock (NYSE: UNH) currently is a better pick compared to Humana stock (NYSE: HUM) in the healthcare sector, despite UnitedHealth being the more expensive of the two. UNH stock trades at about 1.5x trailing revenues, compared to 0.7x for HUM stock. Although both the companies saw a rise in revenue over the last year or so, with a rise in Medicaid and Medicare enrollments, UnitedHealth has performed better over the recent quarters, with a better than expected top-line as well as bottom-line expansion. For perspective, HUM stock is down 1% over the last six months, underperforming the broader indices, with the S&P500 rising 12% over the same period. This compares with a 10% rise for UNH stock. 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 margin growth. Our dashboard UnitedHealth vs Humana: Industry Peers; Which Stock Is A Better Bet? has more details on this. Parts of the analysis are summarized below.
1. Humana’s Revenue Growth Has Been Stronger
Now, UnitedHealth revenue grew at a faster pace of 11% compared to 9% for Humana during the last twelve month period, primarily driven by strong demand for its Optum Health business, which provides care through local medical groups. However, if we were to look at the last three years, Humana’s revenue grew at a CAGR of 13%, much better than the CAGR of 8% for UnitedHealth. Looking forward, Humana’s revenue is expected to rise in low double-digits in 2021 as well as 2022, partly driven by its Kindred acquisition. Earlier this year, Humana announced the acquisition of the remaining 60% stake (Humana owned 40% earlier) in Kindred At Home, the largest home-based care provider in the U.S. A few months back Humana announced the acquisition of One Homecare Solutions, another home care provider. These acquisitions will bolster Humana’s revenue growth going forward.
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For UnitedHealth, the sales are expected to see similar growth of low double-digits this year as well as the next. With the economy opening up gradually, the prescription volume is expected to rise, bolstering the revenue growth for the company. Employment levels have also been trending higher over the recent months, and this is likely to aid the employer & individual insurance premiums for the company. Furthermore, the company’s Optum Health segment has seen strong growth over the recent quarters, a trend expected to continue in the near term. For perspective, Optum Health revenue grew 37% y-o-y for the nine months period ending Sep 2021, compared to just 12% overall top-line growth for the company. Our dashboard on UnitedHealth Group Revenues offers more details on the company’s segments.
2. UnitedHealth Is More Profitable
Looking at profitability, unlike the trend seen in revenue growth, UnitedHealth’s operating margin of 7.7% over the last twelve month period is much better than the 3.5% for Humana. Even if we were to look at last three year average operating margin, UnitedHealth’s 8.0% figure is well above the 5.2% for Humana. UnitedHealth’s operating margin of 7.7% over the last twelve month period compares with 8.0% in 2019, before the pandemic. The current operating margin of 3.5% for Humana is lower compared to UnitedHealth, and it is also lower compared to the 4.9% figure in 2019. Humana’s benefit cost ratio (ratio of medical costs payable against the premiums received) of 86.3% for the nine months period ending Sep 2021, is higher than 82.3% figure for UnitedHealth. This compares with levels of 85.6% for Humana and 82.5% for UnitedHealth in 2019, before the pandemic.
The Net of It All
Now that over half of the U.S. population is fully vaccinated against Covid-19, with overall economic activity picking up, the demand for employer insurance is expected to rise, along with gains in prescription volume as well as increased demand for home health care. This should bode well for both the companies.
Currently, Humana’s current valuation is seemingly more attractive than that of UnitedHealth, with HUM stock trading at about 0.7x trailing revenues, versus 1.5x for UNH stock, and Humana has also seen better revenue growth over the recent years. However, UnitedHealth is much more profitable, partly explaining the difference in valuation of the two companies. Even if we were to look at financial risk, while Humana’s 40% cash as percentage of assets is higher than 11% for UnitedHealth, Humana’s 21% debt as a percentage of its equity is much higher than the 10% figure for UnitedHealth, implying that UnitedHealth has a better debt position, while Humana has a better cash cushion. This means that UNH stock does not appear to be at a higher financial risk compared to HUM stock. Overall, with superior margins for UnitedHealth, and rising demand for its other businesses, including pharmacy care and Optum Health, we think this gap in valuation between UNH and HUM is justified and UNH may continue to outperform HUM stock, going forward.
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