Which Healthcare Stock Is A Better Pick – UnitedHealth Group Or CVS Health?

We believe that CVS Health stock (NYSE: CVS) is currently a better pick over its peer UnitedHealth Group stock (NYSE:UNH), given its attractive valuation. UNH stock trades at 1.3x revenues, versus just 0.2x for CVS. UnitedHealth has delivered better revenue growth lately and is more profitable, partly explaining the gap in the valuation multiples for both these stocks. In the sections below, we discuss why we think CVS is a better pick. In this analysis, we compare a slew of factors, such as historical revenue growth, returns, and valuation.

1. UnitedHealth Stock Has Fared Much Better Than CVS

• UNH stock has seen strong gains of 45% from levels of $350 in early January 2021 to around $515 now, while CVS has seen a notable decline of 20% from levels of $70 to around $55 over the same period. This compares with an increase of about 40% for the S&P 500 over this roughly three-year period.
• However, the changes in both stocks have been far from consistent. Returns for UNH stock were 43% in 2021, 6% in 2022, and -1% in 2023, while CVS saw a 51% rise in 2021, but fell thereafter giving -10% returns in 2022, and -15% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that UNH and CVS underperformed the S&P in 2023.
• In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for other heavyweights in the Health Care sector including LLY, JNJ, and MRK, and even for the megacap stars GOOG, TSLA, and MSFT.
• In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.
• Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates and medical costs, could UNH and CVS face a similar situation as they did in 2023 and underperform the S&P over the next 12 months — or will they see a strong jump? We think both stocks will see higher levels, but CVS may outperform UNH in the next three years.

2. UnitedHealth’s Revenue Growth Is Better 

• UnitedHealth’s revenue growth has been better, with a 13% average annual growth rate in the last three years, compared to 10% for CVS.
• Even if we look at the latest annual results for 2023. UNH fares better with 15% revenue growth versus 11% for CVS.
• UnitedHealth’s revenue growth was primarily driven by the increased demand for its OptumHealth business, which provides health care through local medical groups. For perspective, OptumHealth’s revenue grew 67% between 2020 and 2023, compared to a 44% rise in revenue for the overall company.
• The strong growth in the Optum Health business can be attributed to a rise in the number of patients served under the company’s value-based arrangements, including at-home services.
• CVS’ revenue growth since the beginning of the pandemic was driven by increased demand for Covid-19 testing and vaccine administration. However, this trend has now reversed, given the lower demand for Covid-19 vaccination.
• The company’s healthcare benefits segment has seen a large 40% rise in revenue between 2020 and 2023, led by a rise in total medical membership, which currently stands at 26.8 million, compared to 23.4 million in 2020. This trend is expected to continue over the coming years, given the aging U.S. population.
• Our UnitedHealth Group Revenue Comparison and CVS Health Revenue Comparison dashboards provide more insight into the companies’ sales.
• Looking forward, both UnitedHealth and CVS are expected to see their revenue grow at a mid-to-high single-digit average annual rate in the next three years. While UnitedHealth should continue to benefit from an increase in total customers served for its insurance offerings as well as the Optum segment, CVS will likely continue to see strong growth for its Health Care Benefits business.

3. UnitedHealth Is More Profitable 

• UnitedHealth’s operating margin slid marginally from 8.7% in 2020 to 8.5% in the last twelve months, while CVS’ operating margin declined from 5.2% to 4.3% over this period.
• Healthcare insurance companies are seeing a rise in medical costs with an increase in overall elective procedures. This has impacted their margins in the recent past.
• For perspective, CVS saw its medical benefits ratio surge by 240 bps y-o-y to 86.2%, while UnitedHealth saw a 120 bps rise in its medical care ratio to 83.2% in 2023.
• Furthermore, earlier this year, the U.S. Centers for Medicare & Medicaid Services stated that Medicare Advantage payments would rise by an average of 3.7% in 2025, falling short of the street expectations.
• Looking at financial risk, UnitedHealth fares better. UnitedHealth’s 13% debt as a percentage of equity is much lower than 113% for CVS. Moreover, UnitedHealth’s 11% cash as a percentage of assets is much higher than 6% for CVS, implying that UnitedHealth has a better debt and cash position.

4. The Net of It All

• We see that UnitedHealth has seen better revenue growth, profitability, and has a better financial position. This is also reflected in its superior valuation multiple over CVS.
• However, looking at prospects using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe CVS will offer better returns over the next three years.
• CVS stock currently trades at 0.2x revenues, compared to 0.4x average over the last five years, while UNH stock trades at 1.3x revenues versus 1.4x average over the last five years. This implies CVS has more room for growth if it were to return to its historical average valuation multiple.
• Our UnitedHealth Group (UNH) Valuation Ratios Comparison and CVS Health (CVS) Valuation Ratios Comparison have more details.
• A downbeat Q1’24 and a cut in 2024 outlook has weighed on CVS stock lately. However, we think the negatives are priced in and investors can use the current dip to pick CVS for robust long-term gains.
• While higher medical costs remains a near-term concern, CVS also has some positives to look forward to. It will likely continue to benefit from the steady growth of its healthcare and pharmacy services businesses. The increased prescription volume and drug price inflation will likely drive the top-line expansion in the next three years. The company will also benefit from its last year’s acquisitions of Signify Health and Oak Street Health.

While CVS may outperform UNH in the next three years, it is helpful to see how UnitedHealth Group’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 5/13/2024
[2] Cumulative total returns since the end of 2016

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