Should You Pick UnitedHealth Stock At $510 After A Q4 Beat?

UnitedHealth Group (NYSE: UNH) reported its Q4 results earlier this month, with revenues and earnings above the street expectations. The company reported revenue of $94.4 billion and adjusted earnings of $6.16 per share, both above the $92.1 billion and $5.98 consensus estimates, respectively. In this note, we discuss UnitedHealth Group’s stock performance, key takeaways from its recent results, and valuation.

UNH stock has seen strong gains of 45% from levels of $350 in early January 2021 to around $515 now, vs. an increase of about 30% for the S&P 500 over this roughly 3-year period. However, the increase in UNH stock has been far from consistent. Returns for the stock were 43% in 2021, 6% in 2022, and -1% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that UNH underperformed the S&P in 2023.

In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for other heavyweights in the healthcare sector, including LLY, JNJ, and MRK, and even for the mega-cap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, 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 with high oil prices and elevated interest rates, could UNH face a similar situation as it did in 2023 and underperform the S&P over the next 12 months – or will it see a strong jump? From a valuation perspective, UNH stock looks like it has ample room for growth, in our view. We estimate UnitedHealth Group’s Valuation to be $605 per share, reflecting an 18% upside from its current levels of $512. Our forecast is based on a 22x P/E multiple for UNH and expected earnings of $27.70 on a per-share and adjusted basis for the full year 2024. This compares with the last three-year average of 21x. The company expects its earnings to be in the range of $27.50 to $28.00 in 2024.

UnitedHealth Group’s revenue of $94.4 billion reflects a 14% y-o-y growth driven by a 12% rise in UnitedHealth and a 24% jump in Optum sales. The company saw its operating margin decline by 20 bps to 8.1%. While the UnitedHealth segment operating margin contracted by 30 bps, Optum segment margins contracted by 60 bps due to increased investments to enhance patient services.

Higher revenues and marginally lower operating margin, clubbed with a 1% decline in total shares outstanding, led to a 15% y-o-y rise in the bottom line to $6.16 on a per-share and adjusted basis. Looking forward, challenging macroeconomic factors and medical cost inflation could weigh on UnitedHealth’s near-term performance. For perspective, the company’s medical costs to benefits ratio (MBR) increased to 85% in Q4’23, versus 83% in the prior-year quarter. Although the higher MBR spooked investors, resulting in a 5% decline in UNH stock since it reported the results, the company has kept its earnings outlook unchanged amid continued optimism in the business. We believe that the stock has room for growth, and investors can use the current dip for long-term gains. 

[1] Returns as of 1/23/2024
[2] Cumulative total returns since the end of 2016

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