UnitedHealth Group stock (NYSE: UNH) has declined by 3% since the start of 2024, underperforming the broader S&P 500 index, which has risen by 28%. This underperformance is mainly due to increasing medical costs, which have negatively impacted the company’s profitability. Over a slightly longer period, UNH stock has also struggled, moving from approximately $515 in early 2023 to its current level of $500. The key factors influencing this movement include:
- A 25% increase in the company’s adjusted earnings, which rose from $22.19 in 2022 to $27.66 currently; largely offset by,
- A 22% decline in the company’s trailing P/E ratio, which decreased from 23x to 18x over this period.
UNH stock has been underperforming recently. However, if you’re looking for potential upside with lower volatility than an individual stock, you might consider the High-Quality portfolio, which has outpaced the S&P 500, delivering returns exceeding 91% since its inception.
What Drove UnitedHealth Group’s Earnings Growth?
UnitedHealth’s revenue growth has been primarily driven by the expansion of its OptumHealth segment, which offers healthcare services through affiliated medical groups. OptumHealth’s revenue surged by 48% from 2022 to 2024, significantly outpacing the company’s total revenue growth of 23%. This strong performance is linked to a higher number of patients under value-based care arrangements, including at-home services. Additionally, UnitedHealth’s insurance business recorded over 20% growth in both its Medicaid and Medicare segments during the same period, boosted by an increase in customer enrollments.
Despite the revenue growth, UnitedHealth’s operating margin declined slightly, from 8.8% in 2022 to 8.1% currently. This drop can be attributed in part to rising medical costs, which have increased by 25% over the same timeframe. Furthermore, the company’s profitability was negatively impacted by a cyberattack last year. Nonetheless, UnitedHealth achieved a 25% rise in earnings per share, climbing from $22.19 to $27.66, a figure that slightly outpaces revenue growth. This was aided by a 3% reduction in outstanding shares, thanks to $24 billion in stock buybacks.
What’s Behind The Falling Valuation Multiple?
Investor sentiment around UNH stock has been pressured due to rising medical costs, which have caused the medical care ratio to climb from 82% in 2022 to 85.5% in 2024. Additionally, recent quarterly sales figures fell short of analysts’ expectations, and the company’s 2025 EPS outlook of $30 (at the high end of projections), amid persistent cost pressures, did little to reassure investors. These factors have contributed to the stock’s lower P/E multiple.
Beyond its underperformance, UNH stock has also been volatile. Over the past four years, its annual returns have varied significantly: 45% in 2021, 7% in 2022, 1% in 2023, and -2% in 2024, mirroring the fluctuations seen in the broader S&P 500.
In contrast, the Trefis High Quality Portfolio, a selection of 30 stocks, has demonstrated lower volatility while consistently outperforming the S&P 500. Why is that? As a group, HQ Portfolio stocks have historically delivered higher returns with lower risk than the benchmark index, providing a smoother investment experience. This is further reflected in the HQ Portfolio performance metrics.
With the current economic uncertainty surrounding interest rate cuts and ongoing trade disputes, will UNH stock continue to underperform the S&P 500 in the next 12 months, or will it stage a strong rebound? From a valuation perspective, we believe UNH has considerable upside potential.
We estimate UnitedHealth Group’s valuation to be $606 per share, indicating approximately 20% upside from its current price of $500. The stock is presently trading at a P/E ratio of 18x, below its four-year average of 22x. While some reduction in the valuation multiple is justified due to concerns over medical costs, we believe the recent decline presents a compelling opportunity for long-term investors.
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