Financial Pros Like UnitedHealth…Kinda

Being the top company in an industry should make for the ideal investment…right?

Maybe not.

No one was surprised when UnitedHealth Group (UNH) posted fantastic results in its Q4 earnings report.

However, financial pros took it with a grain of salt.

You see, despite double-digit revenue growth and enormous cash flows, UnitedHealth’s stock is up less than 10% over the last year. And over the last five, it’s up less than 100%.

For reference, the S&P 500 is up over 18% over the last year and 78% in the last five.

UnitedHealth is the best of its peers.

But does that make it a worthwhile investment?

UnitedHealth’s Business

UnitedHealth is a diversified healthcare conglomerate redefining the industry in the United States and globally. 

With its dual platforms, UnitedHealthcare and Optum, UnitedHealth has crafted a unique value proposition: to make health systems work better for everyone.

The operations breakdown as follows:

• UnitedHealthcare (55% of FY23 Revenue) – Consumer-oriented health benefit for individuals, employers, and Medicare and Medicaid beneficiaries.
• Optum Health (45% of FY23 Revenue) – Optum Health serves the global healthcare marketplace through three areas:
  • Optum RX – Prescription benefits management
  • Otpum Health – Care delivery, management, wellness, consumer engagement, and health financial services for consumers, care delivery systems, providers, employers, payers, and public-sector entities.
  • Optum Insight – Business services that leverage data analytics and technology to drive clinical insights and improve administration efficiency.

Recent financial reports show robust growth and solid performance, with Q4 revenues and earnings up 14% YoY.

Plus, the company expects revenues to exceed $400 billion as commercial demand recovers and its services continue to grow.

Financials

Source: Stock Analysis

UnitedHealth continues to impress with double-digit revenue growth and expanding margins.

Impressively, its free-cash-flow has more than tripled in the last decade.

This has allowed UnitedHealth to keep up a regular stream of acquisitions that exceeded $10 billion last year.

But with $29 billion in operating cash flow, the company has more than enough money to buy growth, pay a healthy dividend of $6.7 billon annually, and buy back $8 billion in stock.

However, UnitedHealth increased its total debt from $46 billion to $62.5 billion in 2022 to keep pace with its breakneck expansion.

That pushed up interest expenses to $3.2 billion last year, an effective 5.1% interest rate. Hopefully, they’ll use some of the cash to bring down this number in the near future.

Valuation

Source: Seeking Alpha

UnitedHealth’s solid performance has put a premium on the stock, with its price-to-earnings ratio and price-to-cash ratio double some of its peers.

Only Molina Healthcare (MOH) trades at similar valuations. But as you’ll see below, it’s not nearly as profitable.

Growth

Source: Seeking Alpha

UnitedHealth’s revenue growth last year was stunning.

However, if you start to look back 3-5 years, it’s not at the top of the list.

In fact, looking back 5-years, UnitedHealth’s revenue growth is at the bottom compare to its peers. Cigna (CI) carries the top spot with 5-year average growth of 33.4%.

However, UnitedHealth delivered better earnings growth over the last several years, even if it’s spent a lot of its cash on acquisitions.

Profitability

Source: Seeking Alpha

At the end of the day, UnitedHealth has the best margins in the business.

Its 6% net income margin trounces its peers.

And its returns on assets, equity, and total capital are in the top two.

Our Opinion 9/10

UnitedHealth isn’t going to blow you away like some high-growth tech company.

However, it should keep delivering consistent returns for shareholders.

Our only sticking point is the current valuation.

We’d like to see a pullback to bring the stock below $500 per share.

But for anyone looking for great returns with less volatility, UnitedHealth is a must own.

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