Healthcare stocks UnitedHealth (NYSE: UNH) and Humana (HUM) are expected to see higher levels and offer similar returns in the next three years. Humana’s stock trades at 0.4x trailing revenues versus 1.1x for UnitedHealth, due to the latter’s superior profitability, financial position, and slightly better revenue growth. Finding the best stocks within certain characteristics that suit an investment style is crucial, as larger profits can imply greater market power. In an interactive dashboard analysis of Humana vs. UnitedHealth, the possible returns for both stocks in the next three years are discussed.
UNH stock has shown strong gains of 30% from early January 2021 to around $460 now, while HUM stock has faced a decline of 25% from levels of $410 to around $310 over the same period. However, the changes in both stocks have been inconsistent, with UNH underperforming the S&P in 2023 and HUM underperforming in 2021 and 2023. The Trefis High Quality Portfolio has outperformed the S&P 500 each year, providing better returns with less risk. Despite the uncertain macroeconomic environment, both UNH and HUM are expected to trend higher and offer similar returns over the next three years.
UnitedHealth’s revenue growth has been better, with a 13% average annual growth rate in the last three years compared to 11% for Humana. The company’s OptumHealth business has been driving revenue growth, with a 67% increase in revenue between 2020 and 2023. Humana’s top-line growth has been driven by Medicare Advantage membership growth and higher per-member medical premiums, with a modest rise in its total medical membership base. Both companies are expected to see mid-single-digit revenue growth in the next three years.
In terms of profitability, UnitedHealth has maintained an operating margin of 8.7% in 2023, while Humana’s operating margin declined from 6.5% to 3.8% over the same period. UnitedHealth also has a better financial position, with lower debt and higher cash as a percentage of assets compared to Humana. Healthcare insurance companies are facing rising medical costs, impacting operating margin expansion. Both UNH and HUM stocks have been affected by a recent announcement from the U.S. Centers for Medicare & Medicaid Services regarding Medicare Advantage payments.
Despite UnitedHealth’s better revenue growth, profitability, and financial position, Humana’s stock fares better in terms of current valuation multiples compared to historical averages. Both UnitedHealth and Humana are expected to offer similar returns over the next three years based on P/S ratios. UNH stock is trading slightly below its last five-year average of 1.4x revenues, while Humana stock is trading lower than its last five-year average of 0.6x. In the next three years, an expected return of 15% for UNH and 16% for HUM is predicted.
In conclusion, while both UnitedHealth and Humana may offer similar returns in the next three years, it is crucial to compare how UnitedHealth Group’s peers fare on important metrics. Understanding these comparisons can help investors make informed decisions about where to invest. It is also important to consider other valuable comparisons for companies across industries for a comprehensive investment strategy.
