Should You Pick UnitedHealth Stock After A 15% Fall This Year?

UnitedHealth stock (NYSE: UNH) saw a 6% fall on April 2, after the U.S. Centers for Medicare & Medicaid Services said Medicare Advantage payments would rise by an average of 3.7% in 2025, falling short of the street expectations. This impacted not only UnitedHealth but other Medicare and Medicaid services providers, including Humana, Molina Healthcare, and even CVS Health. The healthcare providers have already been struggling with rising medical costs. UnitedHealth saw its medical costs to benefits ratio (MBR) increase to 85% in Q4’23, versus 83% in the prior-year quarter. The higher MBR spooked investors, and UNH stock fell around 5% after Q4 results. It is now down almost 15% year-to-date.

Looking at a slightly longer term, UNH stock has shown strong gains of 30% from levels of $350 in early January 2021 to around $460 now, vs. an increase of about 40% for the S&P 500 over this roughly three-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 Health Care sector including LLY, JNJ, and MRK, and even for the megacap 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?

We think UNH stock is now undervalued. We estimate UnitedHealth Group’s Valuation to be $605 per share, reflecting over 30% upside from its current levels of $460. At its current price, UNH stock is trading at under 17x forward 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. Note that despite rising medical costs, the company has kept its earnings outlook unchanged amid continued optimism in the business. While there are near term challenges, including higher medical costs and medicare advantage payout falling slightly short of expectations, we think the negatives are well priced in. Overall, investors can use this dip as an opportunity to enter UNH for robust gains in the long term, in our view.

While UNH stock looks like it can see higher levels, it is helpful to see how UnitedHealth’s peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 4/3/2024
[2] Cumulative total returns since the end of 2016

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