Investors Weigh Options: Is CVS Health the Better Bet Over UnitedHealth Group?

In the wake of recent events that have cast a shadow over health insurance companies, investors are weighing options in the sector with heightened scrutiny. Notable among these events is the tragic shooting of Brian Thompson, CEO of the medical insurance arm of UnitedHealth Group (UNH). This unsettling incident, coupled with emerging legislative pressures aimed at forcing health insurance companies to divest from their pharmacy businesses, has generated considerable concern among stakeholders. Donald Trump’s recent remarks suggesting the elimination of intermediaries in the pharmaceutical supply chain further complicate the landscape. His focus appears to be on pharmacy benefit managers (PBMs), entities that negotiate drug prices, which has led to significant declines in share prices for companies like CVS Health (CVS), UNH, and Cigna. In fact, CVS Health’s stock plummeted by 17% in just one week, while UNH saw a decrease of 11%. In light of these developments, the question arises: Is CVS Health a better investment than UnitedHealth Group? Through a comparative analysis, there are various factors to consider, particularly in terms of valuation, revenue growth, and financial stability. Currently, CVS stock is trading at a trailing adjusted earnings multiple of 7.3x, a stark contrast to UNH’s 18.4x. While UnitedHealth has consistently demonstrated superior revenue growth and profitability—with average revenue growth rates of 13% compared to CVS’s 10%—the current valuation gap suggests that CVS may have more room for upward movement in the coming years. CVS has experienced a revenue increase from $269 billion in 2020 to $358 billion in 2023, largely fueled by COVID-19 testing and vaccination efforts. However, as demand for these services wanes, CVS is seeing a shift in its revenue streams, with a notable 40% increase in its healthcare benefits segment due to rising Medicare and Commercial plan memberships. The aging U.S. population is expected to sustain this growth trajectory for CVS. Conversely, UNH’s growth has been significantly bolstered by its OptumHealth segment, which has seen a revenue increase of 67% since 2020. This growth is attributed to its focus on value-based care and expanding at-home services, positioning UNH as a strong contender in the market. Despite these competitive advantages, CVS’s current valuation appears appealing. The stock's recent performance has been troublesome, experiencing a 15% decline since early 2021. This contrasts sharply with UNH’s impressive growth of around 60% during the same period. However, CVS is undergoing restructuring efforts to enhance efficiency and reduce costs, which could improve its profitability moving forward. When analyzing operational margins, both companies have seen declines due to rising medical costs, with CVS operating at 2.9% in the last twelve months against UNH’s 7.0%. Furthermore, UNH enjoys a healthier financial position, boasting a lower debt-to-equity ratio and greater cash reserves compared to CVS, which has been burdened by a high debt ratio of 141%. In terms of shareholder returns, neither CVS nor UNH has managed to consistently outperform the S&P 500 over the last few years. This trend highlights the challenges facing individual stocks in the current market environment. In contrast, a diversified portfolio, such as the Trefis High Quality Portfolio, has consistently outperformed the broader index, emphasizing the importance of strategic investment choices. While UnitedHealth showcases better revenue growth and profitability, the current valuation of CVS presents a compelling case for potential investors. With CVS trading at a significant discount relative to its historical averages, there is optimism regarding its valuation recovery. Analysts estimate CVS’s fair value at approximately $66 per share, indicating a potential upside of nearly 40%, while UNH’s valuation is projected at $606, offering over 20% upside. In conclusion, while UnitedHealth Group currently stands as the more robust entity in terms of growth and financial health, CVS Health’s attractive valuation and ongoing restructuring efforts foster the belief that it may present a better investment opportunity in the medium term. As the healthcare landscape continues to evolve, investors should remain vigilant and assess how these companies adapt to both challenges and opportunities within the sector.