UnitedHealth vs. Humana: Which Healthcare Stock is a More Compelling Buy?

·6 min read

The United States has a health care system that mainly consists of private health care providers and private insurance, but a rising population in the U.S. is enrolled in Medicare and Medicaid plans.

Using the TipRanks Stock Comparison tool, let us compare two healthcare companies, UnitedHealth and Humana, and see how Wall Street analysts feel about these stocks.

UnitedHealth Group (UNH)

UnitedHealth Group offers diversified healthcare services. The company has two business platforms, Optum and UnitedHealthcare, and has four reportable business segments including OptumHealth, OptumInsight, OptumRx, and UnitedHealthcare.

The company reported better-than-expected financial results in Q2 and posted revenues of $71.3 billion, up 14.8% year-over-year. Adjusted EPS came in at $4.70 versus $7.12 in the same quarter a year back.

UNH raised its outlook for FY21 based on its fiscal performance in the first half of the year and now expects adjusted EPS to come in at $18.30 to $18.80 per share. UNH stated in its press release, “The outlook continues to include approximately $1.80 per share in potential net unfavorable COVID-19 effects.”

Following the Q2 results, Oppenheimer analyst Michael Wiederhorn reiterated a Buy and raised the price target from $440 to $465 on the stock.

Wiederhorn noted that UNH’s management said that the treatment or testing costs for COVID-19 were highest in April, but decreased after that. UNH’s CFO John Rex noted at the company’s Q2 earnings call that while utilization of healthcare services among commercial patients was slightly above baseline, utilization among Medicaid and Medicare beneficiaries was still not at their usual rates, so costs remained below the baseline.

UNH’s UnitedHealthcare offers a complete spectrum of health benefit programs. This includes offering consumer-oriented health benefit plans and services to commercial customers, including public sector and mid-sized employers. This segment also serves Medicare and Medicaid beneficiaries. (See UnitedHealth stock chart on TipRanks)

The company serves Medicaid beneficiaries in exchange “for a monthly premium per member from the state program.” To determine payments for treating Medicare patients, the Medicare risk adjustment (MRA) model assigns a risk score to each Medicare beneficiary based on certain parameters, and this risk score is used to calculate a risk-adjusted base payment amount. This amount is then used to calculate total reimbursement for Medicare beneficiaries.

When it comes to Medicare risk adjustment (MRA) revenues, Wiederhorn is of the view that these will rebound next year. The reason for the analyst’s optimism is that UNH noted that the mid-year risk-adjustment payment for this year “was in line with expectations." Additionally, he liked UnitedHealth's statement that its physicians are well engaged with their patients, indicated by the fact that the number of house calls provided by its clinicians nearly doubled from the first half of last year to 1.1 million visits in 1H21.

In conclusion, Wiederhorn said, “We believe the company is positioned well for growth in 2022. Management acknowledges that the trajectory of COVID-19 is unpredictable, but the $1.80/share impact is largely expected to go away next year. This would seem to suggest 2022 growth could exceed its normal 13–16% longterm target by a healthy portion of that $1.80 impact (~9%).”

Consensus among analysts on Wall Street is a Strong Buy based on 16 Buys and 2 Holds. The average UnitedHealth price target of $461.29 implies approximately 10.1% upside potential to current levels.

Humana (HUM)

Humana has three business segments including Retail, Group and Specialty, and Healthcare services. Most of its products or plans under the three business segments are centered around the Medicare program.

Humana is expected to release its Q2 results on July 28.

In Q1, HUM reported adjusted revenues of $20.75 billion, up by around 10% year-over-year from $18.9 billion. Adjusted diluted earnings came in at $7.67 per share versus $5.40 per share.

Following the Q1 earnings, Humana updated its EPS outlook for FY21 and anticipates it to range between $19.62 to $20.12 per share on a GAAP basis. HUM expects EPS to come in between $21.25 to $21.75 per share on an adjusted basis.

Last month, Humana held its Investor Day. Following the Investor Day presentation, Oppenheimer analyst Michael Wiederhorn reiterated a Buy and a price target of $480 on the stock.

Humana stated at its Investor Day that it expects to have exposure of $56,000 per year to the cost of Aduhelm, Biogen’s (BIIB) Alzheimer’s drug that was recently approved. The company added that it will bear these costs "at least until they can adjust bids in 2023.”

Wiederhorn commented, “However, management expects a slow up-take as not all patients are appropriate, and the medical hurdles take time. Additionally, the government could share part/all of the burden. Humana believes its Alzheimer's exposure is similar to Medicare (~10% of beneficiaries).”

Additionally, Humana is a provider of Medicare Advantage (MA) plans, and its pharmacy solutions manage prescription drug coverage for individuals and employer groups. The company stated at its Investor Day that while it expects a mid-year MRA payment update on July 1, HUM management expects volatility from this release. That's because 25% of Medicare members “are in their first full-year with HUM” as a result of the pandemic. (See Humana stock chart on TipRanks)

In other news, last week, Humana agreed to acquire One Homecare Solutions (onehome) from its private equity owner WayPoint Capital Partners for an undisclosed amount. The company expects to complete the acquisition in the second quarter of this year.

Onehome provides home-based health services, pioneering a value-based model in Texas and Florida. It is also a care and risk manager. It offers infusion care, nursing, and durable medical equipment services.

According to Wiederhorn, HUM stated at its Investor Day that “20–35% of total MA spend is addressable in the home and believes its portfolio can address the entire continuum.”

Summing up, the analyst said, “We believe that Humana boasts a compelling growth opportunity in the increasingly appealing MA market. Furthermore, the company also has an opportunity to drive margins given a potentially more favorable reimbursement environment and the maturation of its high-growth member base. Given the attractive growth of the company's MA business, we believe Humana should return significant returns to shareholders.”

Consensus among analysts on Wall Street is a Moderate Buy based on 9 Buys and 5 Holds. The average Humana price target of $490.54 implies approximately 5.2% upside potential to current levels.

Bottom Line

While analysts are cautiously optimistic about Humana, they are bullish about UnitedHealth Group. Based on the upside potential over the next 12 months, UNH does seem to be a better Buy.

Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities