Should You Pick UnitedHealth Stock At $480 After A Q1 Beat?

UnitedHealth Group (NYSE: UNH) recently reported its Q1 results, with revenues and earnings exceeding our expectations. The company reported revenue of $99.8 billion and adjusted earnings of $6.91 per share, above our estimates of $99.7 billion and $6.75, respectively. In this note, we discuss UnitedHealth Group’s stock performance, key takeaways from its recent results, and valuation.

Firstly, looking at its stock performance, UNH stock has shown gains of 35% from levels of $350 in early January 2021 to around $480 now, vs. a similar change 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? 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 $586 per share, reflecting over 20% upside from its current levels of $480. Our forecast is based on a 21x P/E multiple for UNH and expected earnings of $27.70 on a per-share and adjusted basis for the full year 2024. The 21x P/E ratio aligns with the stock’s average over the last three years. The company expects its earnings to be in the range of $27.50 to $28.00 in 2024.

UnitedHealth Group’s revenue of $99.8 billion reflects a 9% y-o-y growth driven by a 7% rise in UnitedHealthcare and a 13% jump in Optum segment sales. The company saw its operating margin decline by 85 bps y-o-y to 8%. While the UnitedHealthcare segment operating margin contracted by 40 bps, Optum segment margins contracted by 110 bps due to the business disruption impact at Change Healthcare. UnitedHealth recorded a $7 billion charge related to the sale of its Brazil business, including the impact of currency translation losses. The company recorded a $0.74 per share impact (on a reported basis) from the cyberattack in Q1. However, the amount for the full-year is expected to be in the range of $1.15 and $1.35 per share. Higher revenues and lower operating margin, clubbed with a 2% decline in total shares outstanding, led to a 10% y-o-y rise in the bottom line to $6.91 on a per-share and adjusted basis.

One of the key factors to watch out for is UnitedHealth’s Medical Care Ratio, which stood at 84.3% in Q1. It includes 40 bps impact from the cyberattack. We were expecting a figure of a little over 84%, and adjusting for the one-time impact of the cyberattack, the medical care ratio has fared slightly better than our estimates. Overall, UnitedHealth has navigated well in Q1, and the company keeping its earnings guidance unchanged is a positive for the stock. Although UNH stock has risen 6% in the last five days, we believe that the stock has more room for growth.

[1] Returns as of 4/18/2024
[2] Cumulative total returns since the end of 2016

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