Should You Buy UnitedHealth Group Stock At $340?
We believe that UnitedHealth Group stock (NYSE: UNH) has more room for growth in the near term. UNH stock is up 74% off the recent bottom, slightly outperforming the S&P which moved 65% since its March lows, with the resumption of economic activities as lockdowns are gradually lifted. This can be attributed to UnitedHealth’s better than expected earnings growth in Q2 and Q3, as deferment of elective surgeries due to the pandemic translated into lower medical expenses for the company. That said, UnitedHealth is not immune to the current crisis, as Covid-19 treatment and testing costs and a decline in commercial insurance has weighed on its earnings growth over the recent quarters.
UNH stock is also up 54% from levels seen in early 2018, over two years ago. Some of the 54% growth of the last 2 years or so is justified by the 20% growth seen in UnitedHealth’s revenues from $201 billion in 2017 to $242 billion in 2019. This clubbed with a 1% decline in shares outstanding due to share repurchases meant the company’s revenue per share grew from $209 to $255 over the same period. The RPS growth was supported by expansion of the company’s P/S multiple. We believe the stock is likely to see upside as it’s government sponsored insurance business has benefited in the current crisis, as we discuss in the section below. Our dashboard, ‘What Factors Drove 54% Change In UnitedHealth Group Stock between 2017 and now?‘, has the underlying numbers.
UnitedHealth’s P/S multiple expanded from 1.1x in 2017 to 1.2x in 2019. While the company’s P/S is 1.3x now (based on trailing RPS), there is a potential upside given the expected growth in RPS over the coming years.
So what’s the likely trigger and timing for upside?
The ongoing Covid-19 crisis has resulted in higher unemployment, benefiting the company’s enrollments for government plans. UnitedHealth reported total revenues of $192 billion in the first nine months of 2020, reflecting a 5.7% y-o-y growth. Its earnings of $13.90, on a per share basis, reflects a strong 28% growth from levels of $10.82 seen in the prior year period. This can be attributed to lower medical costs, which as a percentage of premiums declined from to 82.5% to 77.7% over the same period. That said, the medical costs are expected to rise over the coming quarters, as the surgeries that were postponed earlier in 2020 will get attended to.
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The spread of Coronavirus has also meant an increase in the unemployment rate, which stood at 6.7% in November 2020, compared to the 3.5% figure seen in Nov 2019. This will bode well for UnitedHealth as it is expected to see a pickup in government sponsored insurance, though on the flip side, it also means lower sales of commercial insurance. UnitedHealth’s Medicare & Retirement is a larger segment with 27% contribution to the company’s gross revenues compared to 18% for Employment & Individual segment. Thus far in 2020, while the Employment & Individual segment has seen a revenue decline of 3% or $1.1 billion, Medicare & Retirement segment has seen its revenue grow 10% adding roughly $6.0 billion to the gross revenues. On the Optum side of the business, OptumRX continues to expand led by growth in average billing per prescription while OptumHealth has seen significant expansion, led by new affiliations. Now with economies opening up, doctor visits and total prescription volume is expected to rise aiding the growth for UNH stock.
Looking at the broader economy, the actual recovery and its timing hinge on the containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again.
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