What’s Next For UnitedHealth Stock?
UnitedHealth Group (NYSE: UNH) recently reported its Q3 results, with revenues and earnings exceeding our expectations. The company reported revenue of $100.8 billion and adjusted earnings of $7.15 per share, compared to our estimates of $99 billion and $6.95, respectively. Despite an upbeat performance, UNH stock dropped as much as 10% on Tuesday, October 15, as the company’s outlook fell short of expectations. In this note, we discuss UnitedHealth Group’s stock performance, key takeaways from its recent results, and valuation.
How Did UnitedHealth Perform In Q3?
UnitedHealth Group’s revenue of $100.8 billion in Q3 reflects a 9% y-o-y growth, led by higher sales in both UnitedHealth and Optum segments, which grew 7% and 13% (y-o-y), respectively. The key metric which investors were eyeing was the medical care ratio, which came in at 85.2%, versus 82.3% in the prior-year quarter. This was higher than our estimates of a 200 bps rise. The operating margin contracted 60 bps to 8.6%. The company reported an adjusted EPS of $7.15 per share as compared to $6.56 in the prior year quarter.
Overall, the company navigated well in Q3, with a beat on both top and bottom line. However, investors weren’t happy with the outlook for both 2024 and 2025. The company narrowed its 2024 earnings outlook from $27.50 to $28.00 per share to $27.50 to $27.75 per share. It also stated that it expects $30 at the top end for the 2025 earnings, much below our as well as the consensus estimates of over $31. It appears that the medical costs aren’t going to come down anytime soon, and this may continue to weigh on UnitedHealth’s performance over the coming quarters.
What Does This Mean For UNH Stock?
It is evident from the decline in UNH stock that the investors weren’t happy with the outlook. We have also trimmed our estimates for UNH. We now estimate UnitedHealth Group’s Valuation to be $552 per share, close to its current levels of $560. This represents a 20x P/E multiple and expected earnings of $27.65 on a per-share and adjusted basis for the full year 2024. The 20x P/E ratio is slightly below the stock’s average P/E ratio seen over the last three years. We think a slight dip in valuation multiple seems justified, given the impact of higher costs on the company’s expected earnings next year.
UNH stock has seen a 12% rise this year, underperforming the broader S&P500 index, up 22%. Although UNH is one of a handful of stocks that have increased its value in each of the last three years, but that still wasn’t enough for it to consistently beat the market. 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.
While UNH stock looks fully valued, it is helpful to see how UnitedHealth Group Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.
| Returns | Oct 2024 MTD [1] |
2024 YTD [1] |
2017-24 Total [2] |
| UNH Return | -1% | 12% | 307% |
| S&P 500 Return | 1% | 22% | 160% |
| Trefis Reinforced Value Portfolio | 0% | 15% | 767% |
[1] Returns as of 10/16/2024
[2] Cumulative total returns since the end of 2016
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