Is UnitedHealth’s Stock Fairly Priced?

We estimate UnitedHealth Group’s (NYSE:UNH) fair price estimate to be $305 per share, based on expected 2020 earnings of $16.55 on an adjusted basis and a forward earnings multiple of 18.4x. Our estimates are slightly above the consensus of $16.49 EPS, and implied price to earnings multiple of 18.2x based on the current market price of around $300. UnitedHealth’s stock appears to be fairly priced with limited upside growth, based on our valuation model for the company. We arrive at the stock price estimate for UnitedHealth as: Stock Price = Total Revenue x Net Income Margin ÷ Shares Outstanding x P/E Multiple. In this note we discuss these factors. Look at our interactive dashboard analysis on UnitedHealth Group’s valuation for more details.

UnitedHealth provides individual insurance, employer sponsored health insurance, managed care, private healthcare, health and wellness services, healthcare advisory & technology solutions, and pharmacy benefits management services. Its customers include physicians, hospitals, life sciences companies, healthcare providers, governments, retail customers, and employers. It competes with other insurance companies, including Humana, Aetna, WellPoint, and Cigna.

#1. Estimating UnitedHealth’s Total Revenues:

• Total Revenue has increased from $201 billion in 2017 to $242 billion in 2019, and it will likely grow to $262 billion in 2020.
• This growth will partly be led by higher revenue from Medicare & Retirement segment, which will likely continue to see strong growth in monthly medicare premiums over the next few years.
• Our interactive dashboard analysis, UnitedHealth Revenues: How Does UNH Make Money?, provides an in depth view of the company’s revenues.
• UnitedHealth’s average revenue growth over the past few years has been slightly higher than that of Walgreens and CVS.

#2. Deriving UnitedHealth’s Net Income:

• Net Income grew from $9.9 billion in 2017 to $14.6 billion in 2019, and we expect it to be around $16.0 billion in 2020.
• The company’s overall expenses are growing at a slower pace when compared to its revenues over the past few years.
• In fact, the company’s total expenses as % of revenue has declined from 96% to 94% between 2015 and 2019, and we expect this trend to continue, thereby aiding overall margins.
• Our interactive dashboard analysis, UnitedHealth Expenses: How Does UNH Spend Money?, provides more details on the company’s expenses.

#3. Determining UnitedHealth’s EPS:

• EPS has grown from $10.07 in 2017 to $15.11 in 2019, and we estimate it to be $16.55 in 2020.
• EPS growth can be attributed to higher Net Income and lower No. of Shares.

#4. Estimating UnitedHealth’s Share Price:

• Our Price Estimate of $305 For UnitedHealth’s stock is based on our Detailed Valuation Model, and implies an 18.4x P/E multiple on expected 2020 EPS of $16.55.

Comparing UnitedHealth P/E Multiple Over The Last Three Years With That of Its Peers

• UnitedHealth’s P/E multiple has been higher than that of CVS Health and Walgreens.
• P/E Multiples are based on Share Price at the end of each year, and reported (or expected) earnings for the next full year.

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