Health insurance companies have been in the limelight lately after UnitedHealthcare suspended its guidance for the full year citing higher medical costs. This comes during a challenging time when the CEO Andrew Witty also stepped down for ‘personal reasons.’ To top things off, The Wall Street Journal reported that UnitedHealth is now under criminal investigation for possible Medicare fraud. See more – Is UNH Stock Now A Falling Knife?
UnitedHealthcare stock is down 21% in a week while CVS stock is down 10%. Between the two of them, we believe CVS stock is currently a better pick. CVS stock trades at 9.4x trailing adjusted earnings, compared to 10.2x for UNH stock. UnitedHealth’s better revenue growth and profitability explains the difference between the two. However, we think this gap in valuation will narrow in favor of CVS over the coming years. In the sections below, we discuss why we think CVS is a better pick than UNH by comparing a slew of factors, such as historical revenue growth, returns, and valuation. But, if you want upside with a smoother ride than an individual stock, consider the High-Quality portfolio, which has outperformed the S&P, and clocked >91% returns since inception.
Revenue Growth Drivers
CVS has seen its revenue rise at an average annual rate of 8.5% from $292 billion in 2021 to $373 billion in 2024. On the other hand, UnitedHealth’s average revenue growth rate of 12% from $285 billion to $400 billion over this period has been comparatively better.
CVS Health’s revenue growth fueled by positive performance in both its Medicare and Commercial plans. A key driver of this growth was an increase in total medical membership, which rose from 24.4 million in 2021 to 27.1 million currently. This upward trend in membership is anticipated to persist in the coming years, largely due to the aging U.S. population. Furthermore, CVS Health’s pharmacy and consumer wellness business has demonstrated strong performance recently, propelled by higher prescription volumes and a favorable pharmacy drug mix.
In contrast, UnitedHealth Group’s revenue growth in recent years has been primarily driven by the escalating demand for its OptumHealth business, which delivers healthcare through local medical groups. To illustrate this, OptumHealth’s revenue surged by 95% between 2021 and 2024, significantly outpacing the 39% revenue increase for the company as a whole. This substantial growth in OptumHealth can be attributed to a greater number of patients served under the company’s value-based care models, including the expansion of at-home services. While OptumHealth has been the primary growth engine, UnitedHealth Group’s other segments, such as its pharmacy benefit management (PBM) division, OptumRx, have also performed well. Additionally, the overall increase in Medicare membership has provided a tailwind for its insurance business.
Margin Trends and Cost Pressures
Between 2021 and 2024, CVS experienced a decline in operating margin, falling from 5.2% to 2.6%. In contrast, UnitedHealth Group (UNH) saw its operating margin improve from 7.6% to 8.1% during the same period. Examining the most recent twelve-month performance further highlights this difference, with UNH reporting an operating margin of 8.2% compared to CVS’s 2.9%.
Recently, both companies have faced pressure on their margins due to increasing medical costs. CVS’s medical benefits ratio, which indicates the proportion of premiums spent on medical claims, rose significantly to 92.5% in 2024 from 85% in 2021. Similarly, UNH’s medical benefits ratio increased from 82.6% to 85.5% over the same timeframe. Given the aging U.S. population and the general rise in healthcare expenses, it is anticipated that the medical benefits ratio for both companies will remain elevated in the near term. This increasing pressure on profitability has been a significant factor contributing to the recent underperformance of health insurance stocks.
Financial Risk Assessment
Regarding financial risk, UnitedHealth Group appears to be in a stronger position than CVS Health. UNH’s debt-to-equity ratio of 18% is significantly lower than CVS’s 107%, indicating a considerably lower level of debt relative to its equity. Additionally, UNH’s cash-to-assets ratio of 11% is higher than CVS’ 5%, suggesting a greater cash reserve relative to its total assets. Consequently, these metrics imply that UNH has a more favorable debt profile and a larger cash cushion compared to CVS.
Stock Performance In Last Four Years
UNH stock has seen a 15% fall, moving from levels of $330 in early January 2021 to around $280 now, while CVS stock has seen little change, staying around levels of $60. This compares with an increase of about 55% for the S&P 500 over this roughly 4-year period – indicating that CVS and UNH underperformed the S&P in 2023 and 2024.
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The Verdict – Is CVS A Winner?
We see that UNH has demonstrated better revenue growth, is more profitable, and has a better financial position. However, looking at valuation, we think CVS is the better choice of the two. At its current levels of around $60, CVS stock is trading at 9.4x trailing adjusted earnings of $6.36 per share, aligning with the stock’s average P/E ratio over the last four years.
In comparison, at it current levels near $260, UNH stock is trading at 9.3x trailing adjusted earnings of $27.96 per share, versus the stock’s average P/E ratio of 22x over the last three years. Taking into account the rise in overall medical costs, a fall in valuation multiple for both stocks seem justified. However, despite its attractive valuation UNH seems to have a high risk exposure, especially with the criminal investigation for Medicare fraud. We believe that the valuation gap between the two companies should narrow in favor of CVS, as the profitability of CVS improves. CVS is also undergoing restructuring aimed at improving efficiency and reducing costs.