UnitedHealth Group Incorporated (UNH Quick QuoteUNH - Free Report) continues to strengthen its position as a dominant force in providing healthcare plans. The company has seen its shares rally 15.1% in the past three months, outpacing the industry’s 12.2% growth. Its unmatched scale and operational prowess have also helped it outperform the S&P 500’s growth of 5.9%.

Currently priced at $584.51, the stock is just 1.2% below its 52-week high. This proximity underscores investor confidence and market optimism about this healthcare company’s prospects. Additionally, the stock is trading above its 50-day and 200-day moving averages, signaling strong upward momentum.

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Decoding UNH’s Bright Prospects

Healthcare spending in the country is rising, and with increasing disease cases, this trend is expected to continue. UnitedHealth, with its diverse portfolio, is well-positioned to capitalize on this growing demand, helping offset lower-than-expected margins due to reduced rates for private Medicare plans.

The company also anticipates continued growth in Medicaid, supporting families through the redetermination process. This growing membership in its government business could be a significant tailwind. The Brazil divestiture, while expected to have minimal short-term impact, will likely boost long-term profitability by freeing up cash and allowing UnitedHealth to focus on more profitable operations.

The company is also diversifying its portfolio by expanding into home healthcare and growing its analytics business, aiming to enhance value for partners and create future partnership opportunities. By focusing on AI and other advanced tools, UnitedHealth expects to scale its business, achieve long-term cost reductions and improve overall efficiency.

UnitedHealth's strong cash flow supports strategic acquisitions and shareholder value initiatives. In the first half of 2024, the company returned $6.7 billion to shareholders via share buybacks and dividends. With a 1.44% dividend yield, surpassing the industry average of 1.31%, UNH has consistently raised dividends since 2010.

Despite the impact of the cyber-attack earlier this year, UNH is providing optimistic guidance for 2024, projecting adjusted net EPS in the range of $27.50 to $28.00. The midpoint of this range reflects a 10.5% increase from the 2023 figure of $25.12, underscoring the company's reliance on its operational resilience.

Estimates for UNH & Surprise History

The Zacks Consensus Estimate for 2024 adjusted earnings for UNH is currently pegged at $27.69 per share, indicating 10.2% year-over-year growth. The consensus mark for 2025 suggests a further 12.7% jump. The consensus estimate for 2024 and 2025 revenues suggests 7.3% and 8.2% year-over-year growth, respectively. It beat earnings estimates in each of the past four quarters, with an average surprise of 3.3%. This is depicted in the figure below.

What's Weighing on UNH Stock?

In early April, U.S. regulators upheld the 2025 rates for private Medicare plans that were set in January. Analysts expect this to lower profitability from this operation. Other health insurers, including Humana Inc. (HUM Quick QuoteHUM - Free Report) and CVS Health Corporation (CVS Quick QuoteCVS - Free Report) , are also expected to be affected by the lower rates. These insurers are already contending with rising medical costs, fueled by increased vaccination efforts, higher service utilization and other factors. Since Medicare Advantage is a critical growth engine for the industry, the lower-than-expected rates could further squeeze margins for these companies.

UnitedHealth’s medical care ratio averaged 83.2% for 2023. The ratio jumped to 84.3% in the first quarter of 2024 and 85.1% in the second quarter, meaning a lower portion of premiums remained in hand after paying claims. If this trend continues, the company’s profitability will take a hit. Its declining membership in the international business will further affect premium growth.

Its health service division, Optum, was impacted by the cyber-attack on its Change Healthcare unit in the first quarter. It was estimated to take a hit of around $1.6 billion from the attack. Moreover, the breach has prompted the U.S. Department of Health and Human Services to launch an investigation into the potential violations of patient data protection laws. Beyond the immediate financial losses and business disruptions, the incident is expected to lead to increased spending on cybersecurity measures, further straining resources.

What Does UNH’s Valuation Suggest?

From a valuation perspective, UnitedHealth is trading at a premium compared to the industry average. The company's shares are currently priced at a forward price/earnings ratio of 19.50X, which is higher than its five-year median of 18.96X and the industry average of 16.97X.

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Don’t Rush to Buy UNH Now

Given the company's strong stock performance, increasing membership and growth in healthcare spending, current shareholders may find it wise to hold onto their shares. UnitedHealth's expansion into targeted markets, strategic diversification and attractive dividends present significant growth opportunities. However, potential investors might want to wait for clearer insights into the company's efforts to address rising expenses and a more favorable valuation before considering an entry point.

The stock currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.