More Upside For UnitedHealth’s Stock?

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Upside
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Trefis
UNH: UnitedHealth Group logo
UNH
UnitedHealth Group

UnitedHealth’s stock (NYSE: UNH) lost more than 33% – dropping from $292 at the beginning of the year to below $195 in late March – then spiked 57% to around $307 now. That means it has fully recovered to the levels where it started the year. 

Why? While the Covid-19 outbreak and associated lockdowns resulted in an uncertain outlook for the broader markets, the multi-billion-dollar Fed stimulus announced in late March helped the markets stage a strong recovery. Investors are now expecting a quicker economic rebound, which will bode well for UnitedHealth. In addition, the company posted a strong Q2, led by lower Medical Costs in the wake of deferred elective surgeries.

But is this all there is to the story?

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Not quite. Despite the recent rally, Trefis estimates UnitedHealth’s Valuation at about $350 per share, roughly 15% above the current market price based on two key opportunities.

The first opportunity we see is to UnitedHealth’s Revenue growth in the near-to-medium term. With the economy barely limping back to normalcy following Covid-19 related shutdowns, and unemployment at multi-decade highs in the U.S., the government sponsored health insurance enrollments are expected to increase. Also, UnitedHealth for now is benefiting from the postponement of elective surgeries, as it has to bear the costs of such surgeries. In fact, this factor primarily led to a 2x jump in the company’s Q2 profits compared to the prior year quarter. That said, this benefit could be limited only to a couple of quarters and the trend will reverse as the economies open up and elective surgeries are attended to. UnitedHealth Expenses dashboard provides more details on the company’s different expense items. The company re-affirmed its guidance for the full year, providing more clarity on its revenues in times of uncertainty. We project that UnitedHealth’s net revenue will stand at about $258 billion for 2020, marking a 6.6% y-o-y growth. This compares with the growth rate of 12.5% in 2018, and 7.0% in 2019.

The second key opportunity stems from UnitedHealth’s attractive valuation multiple, compared to its own historical multiple over the recent years. The stock now trades at under 19x its projected 2020 adjusted earnings per share of about $16.45. In comparison, to earn close to $16 per year from a bank, you’d have to deposit about $1,600 in a savings account today (assuming 1% interest rate), so about 100x desired earnings. At UnitedHealth’s current share price of roughly $307, we are talking about a P/E multiple of just under 19x, compared to 21x seen in 2017 and a little under 20x in 2019. And we think a figure closer to 21x, which is toward the higher end of the range seen over the recent years, will be appropriate.

That said, there is a near term risk in the company’s UnitedHealth Employer & Individual segment.

Given the current Covid-19 pandemic, there has been a significant increase in unemployment, which in turn has impacted the company’s Employer & Individual health insurance segment. Though higher unemployment will translate into increased enrollments in government sponsored health insurance plans, the corporate plans usually garner higher margins. The impact on this business was evident from Q2 results, with segment sales dropping 8% to around $13 billion. But, as economies gradually open up, and the risks associated with Covid-19 abates, there will likely be an uptake in corporate plans as well. That said, the rebound in economic growth and its timing hinge on the broader containment of the coronavirus spread. Our dashboard forecasting U.S. Covid-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus. Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. The complete set of coronavirus impact and timing analyses is available here. For UnitedHealth the key trend to watch out for will be the Medical Costs in Q3, as elective surgeries gain pace over the coming months.

While UnitedHealth stock looks like it can gain more, which S&P 500 component stocks can outperform?  TDG, INTU, ROST, FISV are consistent outperformers.

See all Trefis Price Estimates and Download Trefis Data here

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