UnitedHealth Group Incorporated (NYSE:UNH) shares are up more than 2.24% this year and recently increased 0.53% or $1.19 to settle at $225.39. Humana Inc. (NYSE:HUM), on the other hand, is up 6.91% year to date as of 01/10/2018. It currently trades at $265.21 and has returned 2.65% during the past week.
UnitedHealth Group Incorporated (NYSE:UNH) and Humana Inc. (NYSE:HUM) are the two most active stocks in the Health Care Plans industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.
One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect UNH to grow earnings at a 15.10% annual rate over the next 5 years. Comparatively, HUM is expected to grow at a 11.87% annual rate. All else equal, UNH’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. , compared to an EBITDA margin of 6.98% for Humana Inc. (HUM). UNH’s ROI is 11.40% while HUM has a ROI of 5.40%. The interpretation is that UNH’s business generates a higher return on investment than HUM’s.
The value of a stock is simply the present value of its future free cash flows. UNH’s free cash flow (“FCF”) per share for the trailing twelve months was +6.42. Comparatively, HUM’s free cash flow per share was +18.31. On a percent-of-sales basis, UNH’s free cash flow was 3.37% while HUM converted 4.81% of its revenues into cash flow. This means that, for a given level of sales, HUM is able to generate more free cash flow for investors.
UNH’s debt-to-equity ratio is 0.65 versus a D/E of 0.45 for HUM. UNH is therefore the more solvent of the two companies, and has lower financial risk.
UNH trades at a forward P/E of 20.51, a P/B of 4.82, and a P/S of 1.11, compared to a forward P/E of 21.65, a P/B of 3.41, and a P/S of 0.72 for HUM. UNH is the cheaper of the two stocks on an earnings basis but is expensive in terms of P/B and P/S ratio. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. UNH is currently priced at a -8.6% to its one-year price target of 246.59. Comparatively, HUM is -1.62% relative to its price target of 269.59. This suggests that UNH is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 1.60 for UNH and 2.10 for HUM, which implies that analysts are more bullish on the outlook for HUM.
Risk and Volatility
To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. UNH has a beta of 0.69 and HUM’s beta is 0.84. UNH’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. UNH has a short ratio of 2.40 compared to a short interest of 2.86 for HUM. This implies that the market is currently less bearish on the outlook for UNH.
UnitedHealth Group Incorporated (NYSE:UNH) beats Humana Inc. (NYSE:HUM) on a total of 9 of the 14 factors compared between the two stocks. UNH is growing fastly, is more profitable, generates a higher return on investment and higher liquidity. UNH is more undervalued relative to its price target. Finally, UNH has better sentiment signals based on short interest.