Better Buy: CVS Stock or UnitedHealth Stock?

SUMMARY

Parkev Tatevosian, CFA, provides a detailed comparison of CVS Health and UnitedHealth Group, analyzing their recent financial performance and valuation metrics. The discussion highlights revenue trends, profitability, capital efficiency, and relative stock valuations to determine which company may present a better investment opportunity.

MAIN POINTS

• UnitedHealth and CVS are compared in terms of size, with UnitedHealth slightly ahead in trailing 12-month revenue. [0:00]
• UnitedHealth is losing customers due to market exits, while CVS is reducing its brick-and-mortar presence in response to changing consumer behavior. [1:01]
• Both companies have experienced declining operating profit margins over the past decade, with recent figures indicating low profitability. [2:00]
• Returns on invested capital for both firms have been volatile and generally trending downward, especially for CVS due to its capital-intensive operations. [3:00]
• Valuation analysis shows UnitedHealth trading at a higher forward price-to-earnings ratio than CVS, but both appear undervalued based on discounted cash flow models. [4:01]
• CVS is given a slight edge as the preferred investment due to its lower valuation, though the margin is narrow and the decision is characterized as nearly a tie. [6:00]

DETAILED ANALYSIS

CVS Health and UnitedHealth Group are among the largest healthcare companies in the United States, with UnitedHealth recently generating $450 billion in trailing 12-month revenue compared to CVS's $415 billion. While UnitedHealth has typically led in revenue over the past decade, there have been periods where CVS surpassed it. Looking ahead, CVS may experience stronger near-term revenue growth as UnitedHealth exits certain markets due to underestimating customer service costs, resulting in customer losses.

CVS, on the other hand, is adapting to shifts in consumer behavior by reducing its brick-and-mortar footprint, reflecting the broader trend toward online shopping and fewer in-person visits.

Profitability for both companies has weakened over the past decade. UnitedHealth's operating profit margin declined from approximately 7% in 2017 to 4.8% recently, with a notable drop to 3% in early 2025 before partially recovering. CVS's operating margin also fell, from about 6.5% in 2017 to 3.5% in the latest update, indicating both companies are operating with thin margins.

Returns on invested capital (ROIC) have shown volatility but a general downward trend. UnitedHealth's ROIC peaked at 15% in 2022 but has since dropped to 8.1%, while CVS's ROIC has decreased from 8% in 2017 to 3%, a concerning sign for a company with significant capital requirements tied to physical locations.

In terms of valuation, UnitedHealth trades at a forward price-to-earnings ratio of 17.8, higher than CVS's 11, reflecting its stronger recent performance. Discounted cash flow models suggest both stocks are undervalued: UnitedHealth's fair value is estimated at $478 per share versus a market price of $400, and CVS's fair value is $111 per share compared to a current price of $94.50. Despite UnitedHealth's superior performance metrics, CVS's lower valuation makes it marginally more attractive as an investment.

However, the difference is slight, and the overall assessment is that the choice between the two is nearly even, with CVS holding a small advantage due to its greater margin of safety at current prices.

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