Is UnitedHealth (UNH) Overvalued Despite Strong Growth

UnitedHealth (UNH) offers a one-stop shop for those looking to cash in on the $4 trillion U.S. healthcare bonanza. 

With its fingers in every medical pie – insurance, clinics, tech, and drugs – along with consistent double-digit revenue gains, financial pros have made it their top health insurance stock search over the past month.

Yet, the company faced some recent speedbumps with a failed South American business that cost them $1.2 billion and a cyberattack that sent another $776 million down the drain.

But with the stock sitting near all-time highs and a premium valuation relative to other companies, is now the best time to dip your toes in the water?

UnitedHealth Group’s Business

From your local doctor’s office to the latest in AI-driven diagnostics, UnitedHealth’s fingerprints are everywhere. 

They’re not just paying medical bills – they’re running clinics, crunching massive health datasets, and even delivering prescriptions to your door. 

With a footprint spanning all 50 states and 150 countries, UnitedHealthcare serves over 149 million individuals.

Its portfolio includes health benefits, pharmacy services, and data-driven healthcare technology.

UnitedHealth Group segments its business into the following areas:

• UnitedHealthcare (75% of total revenues) – Provides health benefits globally to individuals, employers, and Medicare and Medicaid beneficiaries.
• Optum Health (27% of total revenues) – Delivers care through local medical groups and ambulatory care systems.
• Optum Insight (5% of total revenues) – Offers data, analytics, research, and technology services to improve healthcare operations.
• Optum Rx (33% of total revenues) – Manages pharmacy benefits and provides pharmacy care services.

In its latest quarterly report, UnitedHealth Group reported revenues of $98.9 billion, a 6% increase year-over-year. 

However, the company faced challenges, including a $1.2 billion loss related to its South American operations and $776 million in direct response costs due to a cyberattack on its Change Healthcare unit.

Despite some recent headwinds, including Medicare pressures and regulatory scrutiny, UnitedHealth’s long-term prognosis looks robust. 

With its massive scale and data advantages, the company is well-positioned to weather storms and potentially reach new heights. Some analysts are even eyeing a $700 per share target in the coming year, suggesting this healthcare giant still has room to grow.

Financials

Source: Stock Analysis

UnitedHealthcare prides itself on being a well-managed business with consistent double-digit revenue growth. 

Outside of the recent one-time costs we noted earlier, margins have remained steady over the years.

The company holds $75 billion in debt, a fairly significant amount. Yet, it also carries $28 billion in cash on its balance sheet along with $51 billion in investments.

While the 1.44% dividend isn’t much, management often spends about the same on share buybacks.

 Valuation

Source: Seeking Alpha

UnitedHealthcare’s stock isn’t exactly cheap. 

The company trades at 38x trailing 12-month earnings and 36x forward earnings, nearly twice as expensive as the closest competitor.

And UnitedHealthcare’s price-to-cash flow ratio is a lofty 56x, though its forward price-to-cash flow, which drops those one-time expenses, falls to a manageable 16x.

Yet, that’s still more expensive than Cigna (CI) or Centene (CNC).

Growth

Source: Seeking Alpha

UnitedHealth’s revenue growth is impressive. However, over five years, it’s actually second from the bottom, just ahead of CVS (CVS).

However, UnitedHealth’s EBITA and EBIT growth trounce its competitors over a multi-year period.

Profitability

Source: Seeking Alpha

One of the more impressive metrics is UnitedHealth’s net income margin. At 3.7%, it’s nearly double CVS’s.

The only drawback this year was UnitedHealth’s free cash flow. However, next year, the company expects to return to normal, kicking out close to $20 billion in free cash flow.

Our Opinion 7/10

We’re very impressed with UnitedHealth’s financial performance. The company consistently improves on revenues while maintaining margins.

Our only knock against buying the company now is its valuation.

Insurance carriers aren’t known for huge shareholder gains. So, it’s critical to pick up shares at the best possible price.