UnitedHealth Group (NYSE: UNH) recently reported its Q3 results, with revenues and earnings above the street expectations. The company reported revenue of $92.4 billion and adjusted earnings of $6.56 per share, both above the $91.3 billion and $6.35 consensus estimates, respectively. In this note, we discuss UnitedHealth Group’s stock performance, key takeaways from its recent results, and valuation.
UNH stock has seen solid gains of 55% from levels of $350 in early January 2021 to around $540 now, vs. an increase of about 15% for the S&P 500 over this roughly 3-year period. UNH is one of a handful of stocks that have increased their value in each of the last three years, but that still wasn’t enough for it to consistently beat the market. Returns for the stock were 43% in 2021, 6% in 2022, and 1% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 14% in 2023 (YTD) – indicating that UNH underperformed the S&P in 2023.
In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for other heavyweights in the healthcare sector, including LLY, JNJ, and MRK, and even for the mega-cap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index, less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.
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Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could UNH face a similar situation as it did in 2023 and underperform the S&P over the next 12 months – or will it see a strong jump? From a valuation perspective, UNH stock looks appropriately priced with little room for growth, in our view. We estimate UnitedHealth Group’s Valuation to be $577 per share, reflecting only a 7% upside from its current levels of $538. Our forecast is based on a 23x P/E multiple for UNH and expected earnings of $24.91 on a per-share and adjusted basis for the full year 2023. This compares with the last three-year average of 21x. The company narrowed its earnings outlook to now be in the range of $24.85 to $25.00 (vs. $24.70-$25.00 earlier).
UnitedHealth Group’s revenue of $92.4 billion reflects a 14% y-o-y growth driven by a 13% rise in UnitedHealth and a 22% jump in Optum sales. The company saw its operating margin remain stable at 9.2%. While the UnitedHealth segment operating margin improved by 50 bps, Optum segment margins contracted by 100 bps due to increased investments to cater to patient services.
Higher revenues and stable operating margin led to a 13% y-o-y rise in the bottom line to $6.56 on a per-share and adjusted basis. Looking forward, challenging macroeconomic factors and medical cost inflation could weigh on UnitedHealth’s near-term performance. Although the company’s raised outlook implies continued optimism in the business, we believe that the stock is appropriately priced with little room for growth.
|S&P 500 Return||2%||14%||95%|
|Trefis Reinforced Value Portfolio||1%||25%||540%|
 Month-to-date and year-to-date as of 10/17/2023
 Cumulative total returns since the end of 2016