What’s Driving UnitedHealth Stock Higher?

UnitedHealth stock (NYSE: UNH) has gained 80% in value since early January 2021 – jumping from levels of $335 then to around $600 now – vs. an increase of about 45% for the S&P 500 over this period. This can primarily be attributed to a significant 48% rise in the company’s revenues from $257 billion in 2020 to $381 billion now. Furthermore, the company’s P/S ratio grew 18% to 1.4x now, versus 1.2x in 2020. Investors have rewarded UNH stock thanks to the strong uptick in its Optum segment sales. Our dashboard on Why UnitedHealth Stock Moved has more details.

Notably, UNH is one of a handful of stocks that have increased their value in each of the last three years, but that still wasn’t enough for it to consistently beat the market. Returns for the stock were 45% in 2021, 7% 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 contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is less volatile. And it 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 around rate cuts and multiple wars, 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 $600. 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 figure aligns with the stock’s average P/E ratio over the last three years.

UnitedHealth’s revenue has risen at a 13% average annual growth rate from $257 billion in 2020 to $367 billion in 2023. UnitedHealth’s revenue growth was primarily driven by the increased demand for its OptumHealth business, which provides health care through local medical groups. For perspective, OptumHealth’s revenue grew 67% between 2020 and 2023, compared to a 44% rise in revenue for the overall company. The strong growth in the Optum Health business can be attributed to a rise in the number of patients served under the company’s value-based arrangements, including at-home services.

Now, UnitedHealth Group has two business verticals – UnitedHealth and Optum. UnitedHealth’s insurance business has seen an adverse impact from the rising procedure volumes on the company’s medical costs. This has resulted in the medical care ratio rising from 82% in 2022 to 83.2% in 2023 and 84.7% for the six-month period ending June 2024. This has also weighed on the company’s stock performance over the last year or so.

UnitedHealth has seen its operating margin contract from 8.2% in 2020 to 7.3% for the last twelve months, partly due to the impact of a recent cyber attack and a rise in medical costs lately. The company saw a 3% fall in total shares outstanding over this period, driven by share repurchases. This has aided the company’s bottom line, which rose from $16.03 in 2020 to $23.86 in 2023. On an adjusted basis, earnings grew from $16.88 per share to $25.12 per share over this period. Looking forward, the company expects its earnings to be in the range of $27.50 to $28.00 in 2024.

Overall, UnitedHealth is poised to deliver mid-single-digit average annual top-line growth over the next three years. Investors have rewarded the stock with a higher valuation multiple, but is it worth picking now? We don’t think so. We believe that the positives around the Optum business are already priced in, while higher medical costs remain a near-term risk factor. As such, investors willing to pick UNH will likely be better off waiting for a dip.

While UNH stock looks appropriately priced, it is helpful to see how UnitedHealth Group’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 9/11/2024
[2] Cumulative total returns since the end of 2016

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