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Should You Pick UnitedHealth Stock Over Walmart For Better Returns?

Should You Pick UnitedHealth Stock Over Walmart For Better Returns?

When it comes to choosing stocks for better investment returns, we believe that UnitedHealth Group stock (NYSE: UNH) is a more favorable choice compared to Walmart stock (NYSE: WMT) due to its stronger prospects. Despite being in different sectors, we are comparing these companies because they have a similar market capitalization of around $440 billion and are both part of the Dow 30 index.

Investors often look for stocks that align with their investment style and criteria. Since both stocks are from different sectors, comparing their price-to-sales (P/S) ratios against each other may not provide valuable insights. Instead, we will compare their current multiples with historical data to assess their valuations.

An interesting metric to consider is the Sharpe Ratio, which measures the return per unit of risk. Since early 2017, UNH has had a Sharpe Ratio of 0.8, while WMT has had a ratio of 0.7, both outperforming the S&P 500 Index, which had a ratio of 0.6 over the same period. The Trefis Reinforced Value portfolio, with a Sharpe Ratio of 1.3, offers an example of a high-performance portfolio that combines strong returns and lower risk.

Looking at stock returns, UNH has underperformed the broader market due to rising medical costs, with a 9% decline this year. In contrast, WMT has seen a 15% increase, and the S&P 500 index has risen by 16%. To determine why we believe UNH will offer better returns over WMT in the next three years, we will compare various factors such as historical revenue growth, returns, and valuation.

1. UnitedHealth’s Revenue Growth Is Stronger

  • UnitedHealth has experienced better revenue growth, averaging 10.2% annual growth over the past three years, compared to Walmart’s 5.3%.
  • This growth is driven by increased demand for UnitedHealth’s OptumHealth business, particularly from value-based arrangements and at-home services.
  • UnitedHealth’s total medical enrollments have also increased, currently standing at 51.7 million compared to 49.2 million in 2019.
  • Walmart’s revenue growth has been driven by increased consumer spending on groceries and essential items.
  • Looking at the past twelve months, UnitedHealth has achieved sales growth of 13.7%, outperforming Walmart’s 8.0%.
  • Based on Trefis Machine Learning analysis, UnitedHealth is expected to have a compound annual growth rate (CAGR) of 7.8% over the next three years, whereas Walmart is expected to have a CAGR of 2.3%.

2. UnitedHealth Is More Profitable

  • UnitedHealth’s operating margin has improved from 8.1% in 2019 to 8.8% in 2022, while Walmart’s operating margin declined from 4.2% to 3.0% over the same period.
  • In the past twelve months, UnitedHealth’s operating margin of 8.8% surpasses Walmart’s 3.5%.
  • UnitedHealth is facing rising medical costs due to an increase in elective procedures delayed during the pandemic, impacting its operating margin.
  • Walmart has focused on reducing excess inventory, which has affected its profit margins, especially in a high inflationary environment.
  • Looking at financial risk, both companies have comparable debt levels, but UnitedHealth has a higher cash cushion.

3. The Net Conclusion

  • Considering UnitedHealth’s stronger revenue growth, profitability, and debt position, it explains its higher valuation multiple of 1.3x revenues compared to Walmart’s 0.7x.
  • Even when comparing current valuation multiples to historical averages, UNH performs better. UnitedHealth is currently trading at 1.3x revenues, slightly below its five-year average of 1.4x. In contrast, Walmart trades at 0.7x revenues, slightly higher than its five-year average of 0.6x.
  • Based on Trefis Machine Learning analysis, UnitedHealth is expected to deliver a 19% return over the next three years, while Walmart is expected to experience a -1% return.

While UnitedHealth is expected to outperform Walmart in the next three years, it is also helpful to compare UnitedHealth’s performance with its peers to gain further insights. For more valuable comparisons across industries, check out Peer Comparisons on Trefis.