Should You Pick UnitedHealth Stock At $575 After A Q2 Beat?

UnitedHealth Group (NYSE: UNH) recently reported its Q2 results, with revenues slightly below and earnings exceeding our expectations. The company reported revenue of $98.6 billion and adjusted earnings of $6.80 per share, compared to our estimates of $99 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 65% from levels of $350 in early January 2021 to around $575 now, vs. about a 50% rise 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 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 is appropriately priced now. We estimate UnitedHealth Group’s Valuation to be $580 per share, close to its current levels of $575. Our forecast is based on a 21x P/E multiple for UNH and expected earnings of $27.55 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 $98.6 billion reflects a 6% y-o-y growth driven by a 5% rise in UnitedHealthcare and a 12% jump in Optum segment sales. The company saw its adjusted operating margin remain stable y-o-y at 8.7%. The company saw a $0.92 per share impact from the cyber attack in Q2. However, the amount for the full-year is expected to be in the range of $1.90 and $2.05 per share. Higher revenues and stable operating margin, clubbed with a 1.3% decline in total shares outstanding, led to an 11% y-o-y rise in the bottom line to $6.80 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 85.1% in Q2, reflecting a 190 bps rise y-o-y. Overall, UnitedHealth navigated well in Q2, and the company keeping its earnings guidance unchanged is a positive for the stock. Now that UNH stock has risen 15% in the last five days, we believe that the stock is fully valued.

[1] Returns as of 7/17/2024
[2] Cumulative total returns since the end of 2016

Invest with Trefis Market-Beating Portfolios
See all Trefis Price Estimates