After a fatal targeted shooting in Manhattan, UnitedHealth Group lost a 20-year veteran, Brian Thompson, who was the CEO of the company’s medical insurance segment. The company was in the midst of its annual investor day when this incident took place. UnitedHealth Group has maintained its near term outlook, taking into account the Change Healthcare cyberattack impact. UNH stock has risen 27% from levels of around $480 in early 2022 to $610 now. This can be attributed to:
- a 42% rise in the company’s adjusted earnings from $19.02 in 2021 to $27.02 now; partly offset by,
- an 11% fall in the company’s trailing P/E ratio from 25.4x to 22.6x over this period.
Let’s dive deeper into these factors.
What Drove UnitedHealth Group’s Earnings Growth?
UnitedHealth’s revenue growth was primarily driven by the increased demand for its OptumHealth business, which provides health care through local medical groups. For perspective, OptumHealth’s revenue grew 76% between 2021 and 2023, compared to a 34% rise in revenue for the overall company. The strong growth in the OptumHealth business can be attributed to a rise in the number of patients served under the company’s value-based arrangements, including at-home services.
Now, UnitedHealth Group has two business verticals – UnitedHealth and Optum. UnitedHealth’s insurance business has seen an adverse impact from the rising medical costs and an overall increase in the number of procedures performed. This has also weighed on the company’s stock performance lately.
Not only did UnitedHealth Group see its revenue rise, its adjusted net margin improved slightly from 6.4% in 2021 to 6.5% now. Higher revenues and margin expansion resulted in the bottom line of $27.02, up 42% from $19.02 in 2021.
What’s Behind Falling Valuation Multiple?
Investors have punished UNH stock lately as the rising medical costs raised questions on profitability. The company’s medical care ratio has increased from 82.6% in 2021 to 84.9% for the last twelve-month period. Furthermore, the impact of the cyberattack on profitability added to its woes. Also, while UnitedHealth Group’s results for the latest quarter were above the street estimates, its outlook of $30 at the top-end of adjusted EPS for 2025 fell short of the market expectations. All these factors led to a decline in P/E ratio for UNH.
Does UNH Stock Have Any Room For Growth?
We think UNH stock is appropriately priced now. With 17% gains this year, it has underperformed the S&P500 index, up 27%. Notably, UNH is one of a handful of stocks that have increased their value in each of the last three years. Still, that wasn’t enough for it to consistently beat the market. Returns for UNH stock were 45% in 2021, 7% in 2022, and 1% in 2023. In contrast, the Trefis High Quality Portfolio, with a collection of 30 stocks, is less volatile. And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.
Given the current uncertain macroeconomic environment around rate cuts and rising medical costs for the company, could UNH underperform the S&P over the next 12 months — or will it see a strong jump? We estimate UnitedHealth Group’s Valuation to be $606 per share, aligning with its current levels of $610. Our forecast is based on 22x trailing adjusted earnings of $27.02 per share. The 22x figure aligns with the stock’s average P/E ratio over the last three years. Notably, the Trump presidency may bode well for health insurance companies, amid expectations of better pricing.
While UNH stock looks fully valued, it is helpful to see how UnitedHealth Group Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.
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