We believe that the stock price of UnitedHealth Group (NYSE: UNH) has more room for growth from its current levels of $420. UNH stock is up 2.2x from the levels of around $192 it was at on March 23, 2020, when the broader markets made a bottom. This marks a slight outperformance compared to the S&P 500 which grew 2x over the same period. Even if we were to look at a longer time period, UNH stock has outperformed the broader markets, with its stock rising 90% compared to the S&P 500 rise of 68% since 2017.
Much of this growth in UNH stock over the recent years can be attributed to favorable changes in its P/S ratio. UnitedHealth’s total revenue grew 35% to $272 billion over the last twelve month period, compared to $201 billion in 2017. The surge in revenues can primarily be attributed to increased demand for its Optum business as well as growth in Medicare Advantage enrollments. The company also spent over $15 billion in share repurchases since 2017, resulting in a 2% decline in total shares outstanding. As such, on a per share basis, revenues grew 38% to $288 over the last twelve month period, compared to $209 in 2017. Given a 38% growth in RPS, UnitedHealth’s P/S multiple has expanded to 1.5x currently, compared to 1.0x in 2017. Our dashboard, ‘Factors Driving UnitedHealth Group Stock Returns‘ has the underlying numbers.
UnitedHealth has seen a continued rise in Medicare enrollments and with the aging population in the U.S., this trend will likely continue over the coming years. Furthermore, now that the U.S. economy is opening up gradually, the unemployment rate is expected to decline, implying a rise in employer provided insurance plans. The opening up of economy will also result in higher prescription volume, boding well for its OptumRx business. Lastly, the company’s fastest growing segment – OptumHealth – has expanded its reach to 99 million people currently compared to 91 million in 2017. OptumHealth provides healthcare through local medical groups and ambulatory care systems. The segment continued to see strong growth with revenue rising a solid 40% for the six months period ending June, 2021. Note that OptumHealth revenues have nearly doubled to $40 billion between 2017 and 2020. Overall, UnitedHealth is seeing higher demand for both its health insurance and Optum businesses – and this trend is expected to continue over the coming years. The company also revised its full-year 2021 earnings outlook to $18.55 per share (following the Q2 release), at mid-point of its range, compared to $18.35 earlier. This has been well received with the investors, and the UNH stock is now trading close to its all-time high levels.
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 Israel, along with the trends in vaccination rate. The new delta variant has resulted in another spike in Covid-19 cases in the U.S. The 7-day average now stands at over 150,000 new cases, compared to a figure of just 12,000 new cases towards the end of June. That said, the market has been willing to “look through” the current pandemic and take a longer-term view. With investors focusing their attention on results for 2021 and beyond, the valuations become important in finding value. We see more upside in UNH stock despite it rising 20% year-to-date and it trading close to its all-time high levels of around $430.
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While UNH stock may see higher levels, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Freeport vs UnitedHealth.