Is UnitedHealth Stock Really The Best Bet In Health Insurance?

We believe that there are several stocks in the health insurance industry that are currently better than UnitedHealth Group (NYSE: UNH). UnitedHealth’s current market cap-to-operating income ratio of 15x is much higher than 7x for Cigna (CI), and 11x for Humana (HUM) and Centene (CNC).

Does this gap in valuation between UnitedHealth and its peers make sense? We don’t think so, especially if we look at the fundamentals of these companies. More specifically, we arrive at our conclusion by looking at historical trends in revenues, operating income, and market cap-to-operating income ratio for these companies. Our dashboard Better Bet Than UNH Stock: Pay Less To Get More From CI, HUM, CNC has more details – parts of which are summarized below.

1. Revenue Growth

UnitedHealth’s revenue grew at an average rate of 9% over the last three years, as compared to revenue growth of 79% for Cigna, 13% growth for Humana, and 32% for Centene. Even if we look at the revenue growth over the last twelve month period, UnitedHealth’s revenue growth of 6% is lower than 19% for Humana and 49% for Centene, but better than 5% growth for Cigna. Below we discuss what’s driving the revenues for these companies.

• UnitedHealth’s business was impacted during the pandemic, as higher unemployment meant a reduction in corporate insurance revenues. However, this was offset by growth in enrollments for government sponsored insurance plans. And now with the economy opening up and elective surgeries being attended to, the prescription volume is expected to rise, boding well for its Optum RX segment. The company’s revenue over the recent past has also been driven by the expansion of the Optum Health segment, which provides care through local medical groups.
• Cigna, a health insurance and pharmacy services management company, also benefited from an increase in Medicaid enrollments, taking its total enrollments to 525,000 in 2020, reflecting an 18% growth over the 444,000 figure in 2019. The revenue growth over the recent quarters was also driven by higher pharmacy revenue. However, the large 79% average growth over the last three years can primarily be attributed to the company’s acquisition of Express Scripts in December 2018, expanding the company’s pharmacy management business.
• Humana, a health insurance company, has seen steady revenue growth over the recent years, led by higher premium income from Medicare Advantage as well as increased healthcare services revenues. The company has seen a strong 29% growth in individual Medicare Advantage membership from 3.1 million members in 2018 to a little under 4.0 million members in 2020, aiding its premium revenue growth.
• Centene, a full-line managed services company, which services both government sponsored and private insurance health care programs, has seen its revenue expand sharply in 2020, primarily due to the acquisition of WellCare, as well as higher enrollments in the Medicaid business. In fact, led by WellCare, Centene added over 10 million (67% growth y-o-y) new members taking its total membership base to over 25 million in 2020.

2. Operating Income Growth

The three-year average operating income growth for UnitedHealth stands at 14%, much lower than 52% for Cigna, 16% for Humana, and 38% for Centene. Better revenue growth for the latter three has led to higher operating income for these companies. Looking at the last twelve month period, UnitedHealth’s 14% rise in operating income compares with 49%, 56%, and 73% change for Cigna, Humana, and Centene respectively.

The Net of It All

Although UnitedHealth’s revenue as well as membership base is much larger than Cigna, Humana, and Centene, each of these companies has seen higher growth in revenues and operating income than UnitedHealth in the last twelve months as well as the last three year period.  Yet, they appear to be cheaper than UnitedHealth. Despite better profit and revenue growth, these companies have a comparatively lower market cap-to-operating income ratio.

UnitedHealth’s comparative underperformance in revenue and operating income growth reinforces our conclusion that the stock is expensive compared to its peers, and we think this gap in valuation will eventually narrow over time to favor the group of comparatively less expensive names. As such, we believe that Cigna, Humana, and Centene are currently better buying opportunities compared to UnitedHealth.

While UNH stock looks comparatively expensive, 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 Cognex vs. Humana.

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