Why United Health Group Is a Better Buy Than CVS Health?

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Why United Health Group Is a Better Buy Than CVS Health?

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What happened?

Amidst the coronavirus pandemic, companies in the health insurance sector have not experienced any notable effect of this crisis unlike other sectors, and they have managed to get along much better than the broader market. On one hand, United Health group has seen a growth of 6.8% from first week of February, the early days when WHO announced the coronavirus crisis, while on the other hand CVS Health group’s stock price dropped by -9.8% during the same timeline.

Going through the past fundamentals of both the companies, United Health group has shown better progress than CVS Health group, even at the current market price, price earning (P/E) multiple of United Health group is strong in comparison to CVS Health group. It can be clearly stated that United Health group has managed to outshine CVS Health group in recent times.

So What?

United Health Group has left no stone unturned as it posted strong Q1 results in the previous month and reconfirms its direction for a full year. While United Health group enjoyed the advantage of a higher number of enrollments of Medicaid though the costs increased as an impact of the pandemic, CVS Health group will be displaying its result in the coming week, hoping to see a rise in the earnings considering the increase in the number of Medicaid enrollments and higher sale of pharmacy, retail and OTC products reason being the stocking up of these products including other drugs and consumer healthcare products in the month of March.

Present P/E multiple of United Health group have gone down slightly compared to its P/E multiple in 2019, while CVS Health group’s multiple has gone down intensively compared to its past multiple and also compared to United Health group’s multiple. A buying possibility can be seen in CVS Health group’s stock considering that the earnings and guidance are not below the expectations.

After government’s $2 trillion packages for the economy, United Health group’s stock rushed 19.3%, while 12.8% rise was observed in CVS Health group’s stock after March 23 lows were noticed in the broader market.

While comparing United Health group and CVS Health group for a decade from 2009 till 2019, United Health group represented a change of 1026.2% as its stock price went up from $25.99 in 2009 to $292.71 in 2019. In the same course of time, CVS Health group’s stock price accelerated from $26.37 to $73.18 reporting a change of 177.5%.

This concludes that United Health group’s stock grew at 5.8x rate of CVS Health group.

Now What?

On the basis of past P/E ratios, United Health group appears to be expensive when compared to previous years and also when compared to CVS Health group. P/E ratio is calculated depending on each year’s end-market price and following adjusted earnings.

As the above graphs show the P/E ratios of CVS Health group and United Health group respectively, It can be clearly stated that P/E ratio of United Health of 2019 is 1.74x higher than that of CVS. Higher P/E ratio indicates that the stock’s price is high compared to its earning and is probably overvalued. Current P/E ratio of 2020 will be calculated using adjusted earnings of 2019 and the current market price.

Considering the revenue growth, the United Health group has experienced slower revenue growth in comparison to CVS Health group.

The jump in CVS Health group’s revenue in 2018 and 2019 was due to acquisition with Aetna: an American managed care company.

United Health group’s 2014-19 annual revenue growth is 0.6 times of CVS Health group revenue growth of the same tenure.

Now comparing the historical EPS growth of past years, United Health group has seen a much richer EPS growth in comparison to CVS Health group.

Yearly adjusted EPS growth of United Health group is 2.85 times that of CVS Health group’s yearly adjusted EPS growth rate

While comparing total debt of United Health Group and CVS Health group it can be observed that there is a rise in the total debt of United Health Group from $31 billion to $40 billion in small duration, wherein total debt of CVS Health group has observed a rise in total debt from $27 billion to $73 billion.

 

According to the study of the fundamentals, the United Health group has shown better performance in the last few months and even in the last few years, its EPS is much better than that of CVS Health group. However, revenue growth of CVS Health group was better which was partly due to Aetna acquisition. As United Health group is less leveraged than CVS Health group, it accumulates more cash from its operating activities which facilitate it to meet its term interest and clear debt pay-outs. It is clearly seen that stock of United Health group is better on the basis of its fundamentals but it also appears to be priced in the market which is quite obvious from the P/E multiple of last few years that is 2.2 times higher than that of CVS Health stock.

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