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UnitedHealth Stock Up 12.7% YTD: Is its Premium Valuation Justified?
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Shares of the major healthcare plan provider UnitedHealth Group Incorporated (UNH - Free Report) have gained 12.7% in the year-to-date period, outperforming the industry’s growth of 8.7%. Peers such as Elevance Health, Inc. (ELV - Free Report) and Humana Inc. (HUM - Free Report) have experienced steep declines of 13.7% and 38.2%, respectively, during this time.
The S&P 500 Index has surged 25.9% over the same period, highlighting the stark divergence in performance. UNH stock is down 6% at this point from its 52-week high of $630.73.
UNH’s YTD Price Performance Comparison
Image Source: Zacks Investment Research
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 12-month price/earnings ratio of 19.88, which is higher than its five-year median of 19.14 and the industry average of 16.95.
Image Source: Zacks Investment Research
A premium valuation often reflects strong confidence in a stock's prospects. Let’s examine the company’s fundamentals to determine whether this valuation is justified or if investors may have overly optimistic expectations about its future growth potential.
Behind UNH’s Growth Story
UnitedHealth’s growth is driven by several factors, including rising commercial membership in the domestic market, expansion in Optum Health's value-based care and new client acquisitions for Optum Rx. Strong membership trends in its Commercial segment reflect its competitive positioning and service diversification, which have supported steady momentum.
The company’s financial flexibility is evident in its consistent cash flow, enabling initiatives to boost shareholder value. Operating cash flow jumped 17.3% and 10.9% in 2022 and 2023, respectively. Despite the cyber-attack on its Change Healthcare business in the first quarter, it generated operating cash flows of $21.8 billion in the first nine months of 2024.
In June 2024, UnitedHealth raised its quarterly dividend by 12% and returned $9.6 billion to shareholders through buybacks and dividends in the first nine months of 2024. With a dividend yield of 1.42%, which exceeds the industry average of 1.33%, UnitedHealth has a history of consistent dividend increases since 2010.
Will UNH’s Growth Continue?
Healthcare spending in the United States is increasing, driven by rising disease prevalence. UnitedHealth is well-positioned to benefit from this trend, leveraging its diverse offerings to offset margin pressures from slower private Medicare rate growth.
The divestiture of its Brazil operations, expected to have minimal short-term impact, will enhance portfolio profitability in the long run by freeing cash for more lucrative ventures.
Additionally, UnitedHealth is diversifying into areas like home healthcare and growing its analytics business, focusing on AI-driven tools to scale operations, cut costs and improve efficiency while expanding partnership opportunities.
These are likely to help the company offset the headwinds it is facing and continue its growth story in the long run.
What are the Headwinds?
The rise in medical costs that started last year, partly due to the lingering effects of the pandemic, is unlikely to subside soon. This increase continues to catch health insurers off guard, including UNH, as they seem to lack a full understanding of the situation. Adding to these rising cost woes are aggressive billing by hospitals and states reducing Medicaid coverage, which puts additional strain on the margins.
Moreover, UNH is managing the rising costs of the Change Healthcare cyberattack, which has led to an investigation into potential patient data protection violations. To mitigate the fallout from the attack, UNH has extended interest-free loans and advance payments to clients. Higher cybersecurity expenses are also anticipated in the coming days to ensure such incidents never happen again.
These combined pressures, leading to downward adjustments in earnings estimates for 2024 and 2025, raise investor concerns.
Image Source: Zacks Investment Research
Should You Stick With UNH Stock Now?
While immediate resolution to UnitedHealth's challenges seems unlikely, the company and the broader health insurance industry will likely focus on cost-cutting initiatives and lobbying for better government reimbursement rates over time. To mitigate the strain from government-backed programs, insurers are expected to increase premiums in the commercial market, partially offsetting the negative impacts.
UnitedHealth’s scale, targeted market expansions and diversification strategies position it well for long-term growth, supporting the idea that its high valuation may be justified.Given its promising outlook, retaining this Zacks Rank #3 (Hold) stock appears prudent. Meanwhile, new investors might consider waiting for a more attractive entry point while keeping an eye on its cost-curbing efforts. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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UnitedHealth Stock Up 12.7% YTD: Is its Premium Valuation Justified?
Shares of the major healthcare plan provider UnitedHealth Group Incorporated (UNH - Free Report) have gained 12.7% in the year-to-date period, outperforming the industry’s growth of 8.7%. Peers such as Elevance Health, Inc. (ELV - Free Report) and Humana Inc. (HUM - Free Report) have experienced steep declines of 13.7% and 38.2%, respectively, during this time.
The S&P 500 Index has surged 25.9% over the same period, highlighting the stark divergence in performance. UNH stock is down 6% at this point from its 52-week high of $630.73.
UNH’s YTD Price Performance Comparison
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 12-month price/earnings ratio of 19.88, which is higher than its five-year median of 19.14 and the industry average of 16.95.
A premium valuation often reflects strong confidence in a stock's prospects. Let’s examine the company’s fundamentals to determine whether this valuation is justified or if investors may have overly optimistic expectations about its future growth potential.
Behind UNH’s Growth Story
UnitedHealth’s growth is driven by several factors, including rising commercial membership in the domestic market, expansion in Optum Health's value-based care and new client acquisitions for Optum Rx. Strong membership trends in its Commercial segment reflect its competitive positioning and service diversification, which have supported steady momentum.
The company’s financial flexibility is evident in its consistent cash flow, enabling initiatives to boost shareholder value. Operating cash flow jumped 17.3% and 10.9% in 2022 and 2023, respectively. Despite the cyber-attack on its Change Healthcare business in the first quarter, it generated operating cash flows of $21.8 billion in the first nine months of 2024.
In June 2024, UnitedHealth raised its quarterly dividend by 12% and returned $9.6 billion to shareholders through buybacks and dividends in the first nine months of 2024. With a dividend yield of 1.42%, which exceeds the industry average of 1.33%, UnitedHealth has a history of consistent dividend increases since 2010.
Will UNH’s Growth Continue?
Healthcare spending in the United States is increasing, driven by rising disease prevalence. UnitedHealth is well-positioned to benefit from this trend, leveraging its diverse offerings to offset margin pressures from slower private Medicare rate growth.
The divestiture of its Brazil operations, expected to have minimal short-term impact, will enhance portfolio profitability in the long run by freeing cash for more lucrative ventures.
Additionally, UnitedHealth is diversifying into areas like home healthcare and growing its analytics business, focusing on AI-driven tools to scale operations, cut costs and improve efficiency while expanding partnership opportunities.
These are likely to help the company offset the headwinds it is facing and continue its growth story in the long run.
What are the Headwinds?
The rise in medical costs that started last year, partly due to the lingering effects of the pandemic, is unlikely to subside soon. This increase continues to catch health insurers off guard, including UNH, as they seem to lack a full understanding of the situation. Adding to these rising cost woes are aggressive billing by hospitals and states reducing Medicaid coverage, which puts additional strain on the margins.
Moreover, UNH is managing the rising costs of the Change Healthcare cyberattack, which has led to an investigation into potential patient data protection violations. To mitigate the fallout from the attack, UNH has extended interest-free loans and advance payments to clients. Higher cybersecurity expenses are also anticipated in the coming days to ensure such incidents never happen again.
These combined pressures, leading to downward adjustments in earnings estimates for 2024 and 2025, raise investor concerns.
Should You Stick With UNH Stock Now?
While immediate resolution to UnitedHealth's challenges seems unlikely, the company and the broader health insurance industry will likely focus on cost-cutting initiatives and lobbying for better government reimbursement rates over time. To mitigate the strain from government-backed programs, insurers are expected to increase premiums in the commercial market, partially offsetting the negative impacts.
UnitedHealth’s scale, targeted market expansions and diversification strategies position it well for long-term growth, supporting the idea that its high valuation may be justified.Given its promising outlook, retaining this Zacks Rank #3 (Hold) stock appears prudent. Meanwhile, new investors might consider waiting for a more attractive entry point while keeping an eye on its cost-curbing efforts. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.