Finance

A Side-by-side Analysis of UnitedHealth Group Incorporated (UNH) and Ally Financial Inc. (ALLY)

UnitedHealth Group Incorporated (NYSE:UNH) shares are up more than 19.33% this year and recently decreased -2.60% or -$7.03 to settle at $263.08. Ally Financial Inc. (NYSE:ALLY), on the other hand, is down -9.88% year to date as of 10/10/2018. It currently trades at $26.28 and has returned -2.12% during the past week.

UnitedHealth Group Incorporated (NYSE:UNH) and Ally Financial Inc. (NYSE:ALLY) are the two most active stocks in the Health Care Plans industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.

Growth

Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect UNH to grow earnings at a 15.37% annual rate over the next 5 years. Comparatively, ALLY is expected to grow at a 12.67% 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 138.46% for Ally Financial Inc. (ALLY). UNH’s ROI is 13.60% while ALLY has a ROI of 6.70%. The interpretation is that UNH’s business generates a higher return on investment than ALLY’s.

Cash Flow



Cash is king when it comes to investing. UNH’s free cash flow (“FCF”) per share for the trailing twelve months was +2.71. Comparatively, ALLY’s free cash flow per share was -0.65. On a percent-of-sales basis, UNH’s free cash flow was 1.3% while ALLY converted -2.78% of its revenues into cash flow. This means that, for a given level of sales, UNH is able to generate more free cash flow for investors.

Financial Risk

UNH’s debt-to-equity ratio is 0.73 versus a D/E of 3.60 for ALLY. ALLY is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

UNH trades at a forward P/E of 18.26, a P/B of 5.24, and a P/S of 1.18, compared to a forward P/E of 7.39, a P/B of 0.86, and a P/S of 1.31 for ALLY. UNH is the cheaper of the two stocks on sales basis but is expensive in terms of P/E and P/B 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

A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. UNH is currently priced at a -10.01% to its one-year price target of 292.33. Comparatively, ALLY is -22.02% relative to its price target of 33.70. This suggests that ALLY is the better investment over the next year.

Risk and Volatility

No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. UNH has a beta of 0.82 and ALLY’s beta is 1.29. UNH’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment. UNH has a short ratio of 2.31 compared to a short interest of 5.96 for ALLY. This implies that the market is currently less bearish on the outlook for UNH.

Summary




UnitedHealth Group Incorporated (NYSE:UNH) beats Ally Financial Inc. (NYSE:ALLY) on a total of 10 of the 14 factors compared between the two stocks. UNH is growing fastly, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. Finally, UNH has better sentiment signals based on short interest.

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