UnitedHealth Stock Looks Attractive At $350

by Trefis Team
UnitedHealth Group
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UnitedHealth stock (NYSE: UNH) is up 20% since the start of the year and it has gained around 80% from its March lows. Despite the recent rally, UnitedHealth could offer an upside in the near term, as the company’s revenues in the last two quarters have grown by 5%. The ongoing Covid-19 crisis has resulted in higher unemployment, benefiting the company’s enrollments for government plans. Also, the medical costs have been lower thus far in 2020, given the deferment of elective surgeries earlier in the year. This is likely to bolster the earnings growth rate of the company in the near term – leading to stock price growth.

UNH stock has rallied from $194 to $352 off the recent bottom compared to the S&P which moved 61% over the same time period. Higher demand for health insurance has helped the stock in beating overall markets. Moreover, the stock is up 60% from levels seen in early 2018, over two years ago. UNH stock has fully recovered to the level it was at before the drop in February due to the coronavirus outbreak becoming a pandemic. Despite the 80% rise since the March 23 lows, we feel that the company’s stock still has potential as it has benefited in the current crisis and its valuation implies it has further to go. Our dashboard ‘Buy Or Sell UnitedHealth Stock provides the key numbers behind our thinking, and we explain more below.

Some of the stock price rise over the last 2 years is justified by the roughly 20% growth seen in UnitedHealth’s revenues from $201 billion in 2017 to $242 billion in 2019. This clubbed with Net Margin expansion of 9% from 5.2% to 5.7% meant that earnings grew 31%. On a per share basis, earnings were up 33% from $10.95 to $14.55, led by a 1.4% decline in total shares outstanding due to share repurchases.

Finally, UnitedHealth’s P/E ratio did not expand despite revenue and earnings moving higher. It remained around 20x in 2017, 2018, as well as 2019. While the company’s P/E has now increased to 24x trailing earnings, it could see further expansion given the benefit to its business in the current pandemic, and higher revenues and earnings growth in 2020 and 2021.

How Is Coronavirus Impacting UNH Stock?

The global spread of Coronavirus has meant there just aren’t many people visiting doctors for non-emergency cases, and several types of elective surgeries are being postponed, resulting in lower medical costs for UNH, which translated into its MBR ratio (medical costs as % of premium revenue) declining to 77.7% for the nine month period ending September 2020, compared to the 82.5% figure seen in the prior year period. This also aided the company’s earnings, which grew 28% to $13.90 thus far in 2020, compared to $10.82 in the prior year period. It should be noted that this is a temporary benefit to the company. As economies open up and there is an increase in elective surgeries, the MBR ratio will also increase. In fact, if we look purely at Q3, the MBR ratio was at 81.9% slightly below the 82.4% figure seen in the prior year quarter.

From a sales point of view, UnitedHealth is expected to see a pickup in government sponsored insurance, due to high unemployment in 2020. On the Optum side of the business, OptumRX continues to expand led by growth in average billing per prescription while OptumHealth has seen significant expansion, led by new affiliations. OptumHealth revenue of $10.5 billion in Q3 reflect a solid 29% y-o-y growth. The above benefits resulted in a strong Q3 for UnitedHealth, with revenues growing 8% to $65 billion, while earnings on a per share basis declined 10% to $3.34 compared to $3.73 in the prior year quarter. The decline in earnings can largely be attributed to an increase in the operating costs and cost of products sold in Q3 2020, due to the impact of the current pandemic.

Overall, Q3 was better than the street estimates, and we expect overall insurance and healthcare demand to remain higher in 2020 due to uncertainty resulting from the outbreak of coronavirus which leads us to believe that the stock is currently undervalued.

Looking at the broader economy, the actual recovery and its timing hinge on the containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again. At levels of $350, UnitedHealth stock is trading at 19x its 2021 estimated earnings of $18.33, compared to levels of over 20x seen over recent years, implying the stock still has some room for growth.

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