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Stock Strategist Industry Reports

Checkup for Healthcare Moats

We downgraded these three stocks, but they’re still undervalued.

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We have taken a fresh look at U.S. health insurers and pharmacy benefit managers UnitedHealth Group (UNH), CVS Health (CVS), and Cigna (CI). We continue to view their stocks as undervalued. However, after reviewing the competitive dynamics and ongoing debate about these players' long-term roles in the U.S. health system, we reduced our economic moat rating for UnitedHealth to narrow from wide and cut our moat trend ratings for CVS and Cigna to stable from positive. All of these companies now have narrow moats and stable moat trends.

The U.S. health system continues to put significant financial pressure on many U.S. citizens, and we think medical insurers and pharmacy benefit managers will remain key targets of regulators looking to improve the U.S. healthcare system. These organizations may continue to face significant event risk that could cut into profitability eventually. While manageable changes to the status quo appear much more likely than extreme changes like a drastic "Medicare for All" scenario that eliminates private insurance in the intermediate term, the potential for ongoing pressure on profitability in a strained U.S. healthcare system acts as a fundamental constraint to our moat and moat trend ratings in this industry.

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Julie Utterback does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.