Why UnitedHealth's Stock Will Continue Rebounding

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About: UnitedHealth Group Incorporated (UNH)
by: Chris Lau
Summary

UnitedHealth rose 7% last week, erasing much of the 10% drop from the week before that.

Government scrutiny for drug pricing and healthcare will wind down.

Stock is still discounted relative to forward earnings.

The dramatic plunge in shares of UnitedHealth Group Incorporated (UNH) appears driven by congressional testimonies from the CEOs of major drug firms. Markets all but erased the gains that followed the company’s strong fourth-quarter earnings report. Even though it appears likely that UNH stock will re-test lows not seen since the December 2018 bear market selloff, smart value investors should decide now if the stock will climb back to the $270 - $285 range. With strong performance from Optum, UnitedHealth’s Health Services Platform, chances are good the stock will continue the 7% rebounded that started last week.

UnitedHealth (NYSE:<a href=

Strong Fourth Quarter Revenues

Investors had more than UnitedHealth’s $226 billion in quarterly revenue, up 12% year-on-year, to appreciate. Optum’s revenue crossed the $100 billion level for the first time, helping to add to the $3.10 EPS in the quarter. UNH earned $12.19 a share for the full year, valuing the stock at 20.8 times earnings. Its 2019 EPS outlook for 2019 is even better, with net earnings expected to come in at $13.70 - $14.00 a share. That brings down the forward P/E to 15.3 times.

These multiples are noteworthy because UNH’s revenue growth will likely accelerate at a faster rate, thanks to the positive contributions of Optum. In 2018, the unit only added modestly to results. Yet as UNH continues to dedicate itself to improving health and wellness, saving money for the customers it serves, profits will grow.

UNH By the Numbers

UnitedHealth added 2.4 million more people in 2018. Full earnings grew 7.2% to $9.1 billion. In the fourth quarter, earnings still grew even though the Medicaid program did not perform so well.

Optum, which is a health services business, is a particularly relevant positive growth catalyst for the company because of how it embraces technology. Tech investors may instead look at buying Microsoft (MSFT), Oracle (ORCL), Splunk (SPLK), or Salesforce.com (CRM) but will have to pay a higher P/E multiple for them. With UNH stock, the Optum unit uses data analytics and embraces technology to cut healthcare costs and increase the service quality for its customers.

Optum’s Growth

Optum made $10.1 billion more in revenue, or $101.3 billion, in Q4. This 11.1% year-on-year growth is due to the 6% customer growth. It added 5 million people in the quarter and served 93 million for the year 2018.

Optum has an edge over the competition. The unit uses its data to analyze what the best course of action to take for treatment. Patients are given a better option if one is available. Within OptumRx, PreCheck MyScript is driving market share growth and giving UNH another source of earnings.

Short-Term Uncertainties

The U.S. government questioning CEOs of major drug companies is creating near-term uncertainties for health plan providers. UnitedHealth’s choppy trading action in the last two months is indicative of that. Investors who believe the government will impose price controls on drug firms should look at starting a position in UNH stock, too. With the company driven to pave the change in healthcare delivery while cutting costs along the way, UNH is poised to grow at 13% - 16% annually for the long term.

UnitedHealth is clearly out of favor, just as Walgreens (WBA) and CVS Health Corporation (CVS) are, too, just to name a few.

Price Target and Your Takeaway

Wall Street analysts did not give up on UnitedHealth. Based on the 12 analysts covering the stock, the average price target implies upside of 30%, according to Tipranks. Conversely, investors could build a downside fair value on UNH stock using finbox.io by looking at its low dividend yield. Still, UNH management believes its business may grow in the double digits for years to come.

Markets overreacted to government scrutiny in the drug stock sector by dumping healthcare plan provider stocks. The selling is overdone and the sector could find buyers at this price level.

Investors should take note that the stock traded ex dividend (of $0.90 a share) on March 8. Though the forward yield is 1.4%, the gains will come from the stock’s eventual recovery in the weeks and months ahead.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.