We think that Cigna Stock (NYSE: CI) is currently a better choice compared to UnitedHealth Stock (NYSE: UNH) in the healthcare sector, given its comparatively lower valuation and better outlook. UNH shares trade at around 1.6x trailing earnings, compared to just 0.4x for CI shares. Although both companies have seen an increase in revenue over the past year or so, with increased Medicaid and Medicare enrollment, UnitedHealth has performed better, with better-than-expected revenue and earnings expansion.
In terms of stock returns, UNH stock, with returns of 17% over the past six months, has outperformed CI stock, up around 11%. Both stocks outperformed broader indices, with the S&P 500 falling 7% over the same period. However, there is more to the comparison, and we think CI stands out with higher expected returns than UNH, as discussed in the sections below. We compare a host of factors such as historical revenue growth, returns and valuation multiple in an interactive dashboard analysis UnitedHealth Group vs. Cigna: Which stock is a better bet? Parts of the analysis are summarized below.
1. Cigna’s revenue growth in recent years has been stronger
- Both companies have managed to post sales growth in recent quarters, but UnitedHealth has seen relatively faster revenue growth of 12% in the last twelve months, compared to 8% for Cigna.
- Over a longer period, UnitedHealth’s sales increased at a CAGR of 8.4%, from $226 billion in 2018 to $287 billion in the last twelve months, while Cigna’s revenue increased to a CAGR of 76.2%, growing from $48.7 billion to $174.1 billion in the last twelve months. same period.
- Cigna’s strong revenue growth can be attributed to its acquisition of Express Scripts in December 2018.
- For UnitedHealth, revenue growth was partly driven by increased demand for its OptumHealth business, which provides health care through local medical groups.
- Our UnitedHealth Recipes and Cigna turnover dashboards provide more detail on business segments.
- Going forward, both companies’ revenues are expected to grow at a similar pace. The table below summarizes our revenue forecast for UNH and CI over the next three years and indicates a CAGR of 7.6% for UnitedHealth, compared to a CAGR of 7.8% for Cigna.
- Note that we have different methodologies for companies negatively impacted by Covid and for companies not impacted or positively impacted by Covid when forecasting future revenues. For businesses negatively impacted by Covid, we consider the quarterly revenue recovery trajectory to predict recovery at the pre-Covid revenue run rate. Beyond the recovery point, we apply the average annual growth observed the three years preceding the Covid to simulate the return to normal conditions. For companies with positive revenue growth during Covid, we consider pre-Covid average annual growth with some growth weight during Covid and past twelve months.
2. UnitedHealth is more profitable and offers less risk
- UnitedHealth’s trailing 12-month operating margin of 8.9% is higher than Cigna’s 4.6%.
- If we look at recent margin growth, both companies have seen declines, but UnitedHealth is marginally better, with margin change last twelve months vs last three years at -0.1%, versus -1.3 % for Cigna.
- UnitedHealth’s free cash flow margin of 7.8% is also better than Cigna’s 4.1%.
- When it comes to financial risk, UnitedHealth beats Cigna. Its 9.3% debt as a percentage of equity is well below Cigna’s 43.5%. Its 11.3% cash as a percentage of assets is well above Cigna’s 3.9%, implying that UnitedHealth has a better debt and cash position, indicating comparatively lower risk.
3. Filet of Everything
- We find that UnitedHealth is more profitable than Cigna and offers comparatively lower financial risk. On the other hand, Cigna has seen better revenue growth over the past few years, and it is available at a lower valuation than UnitedHealth.
- Now, looking at the outlook, using P/S as a base, due to the large swings in both P/E and P/EBIT, we believe Cigna is currently the better choice of the two. The table below summarizes our revenue and return forecasts for UNH and CI over the next three years and indicates an expected return of 20% for CI over this period versus only an 8% expected return for UNH, implying that investors better buy CI on UNH, based on Trefis Machine Learning analysis – UnitedHealth vs. Cigna – which also provides more detail on how we arrive at these numbers.
While CI stock may outperform UNH, the Covid-19 crisis has created many price discontinuities which may provide interesting trading opportunities. For example, you’ll be surprised how counter-intuitive stock valuation is to Medtronic vs. IDEXX Laboratories.
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