Does Covid-19 Create A Good Buying Opportunity For UnitedHealth Stock?

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UnitedHealth Group

UnitedHealth Group (NYSE: UNH), the largest healthcare company in the world, has seen its stock grow by about 53% from March lows of under $200 to around $300 currently, outperforming the broader indices, as the company stands to benefit in the Covid-19 crisis with higher insurance sales. The stock has fared well over the recent years, as well, with 40% gains since early 2018. Despite the surge seen over the recent weeks, the stock could rally further as states are expecting a strong growth in Medicaid enrollments, amid high unemployment levels. Our dashboard, ‘What Factors Drove 40% Change In UnitedHealth Group Stock Between 2017 And Now?‘, provides the key numbers behind our thinking, and we explain more below.

UnitedHealth’s Fundamentals Have Been Strong Over The Recent Years

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UnitedHealth’s revenues expanded by about 20% between 2017 and 2019, rising from around $201 billion to $242 billion. Net income grew from around $10.8 billion to around $14.2 billion, driven by an expansion of net margins from around 5.4% to 5.9%. Earnings growth of 33%, on a per-share basis, was slightly higher, as the company’s share count declined by about 1.3% to 951 million. The strong fundamentals were supported by the markets as investors assigned a higher valuation to UnitedHealth, with its P/E multiple expanding 5% from around 19.5x in 2017 to 20.5x currently.

So What’s The Likely Trigger For UnitedHealth?

The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity.  The U.S. economy contracted by close to 5% in Q1 and is expected to see a sharper decline in Q2. This has led to an increase in unemployment, which stood at a very high rate of 14.7% in April and it is expected to be as high as 20% in May, marking the highest levels since the Great Depression. Given the trends in the unemployment rate, UnitedHealth will see higher enrollments for its Medicaid offerings, though it will likely see a decline in high-margin corporate plans. Another positive for UnitedHealth is a lower medical care ratio, which compares the healthcare-related costs to revenues. Medical care ratio is expected to be lower in the first half of this year, given the postponement of millions of elective surgeries. However, it is a temporary relief and the costs would go up when the hospitals resume the normal operations, likely in the second half.

We believe the long-term outlook for the company remains robust making the stock attractive even at current levels. Health insurance is crucial, especially in times of health crisis such as now, and UnitedHealth being a leader in this space, should stand to benefit meaningfully led by higher enrollments both in government sponsored and individual healthcare plans. Moreover, the company’s solid cash balance of $24 billion and manageable debt levels of $52 billion should enable it to swiftly sail through the current recession without undue risk.

Looking for insights on health care stocks? See 2007-08 vs. 2020 Crisis Comparison: How Did Molina Healthcare Stock Fare Compared With S&P 500? and Health Insurance Stocks Poised For Gains After COVID-19

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