Why UnitedHealth Shares May Keep Moving Higher From Here

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

UnitedHealth reported a strong first quarter that sent the stock higher since then.

Services revenue shows promise of faster growth.

Stock is fairly valued at minimum and has additional upside from here.

When I last looked at UnitedHealth (UNH) on April 16, I suggested the stock was due for a rebound. So when the company reported first quarter results that day, that gave shareholders enough confidence to either hold the stock or to add to the position. What did markets like about the first quarter results and what should investors expect next from the company this year?

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UNH reported revenue growing a solid 9.3% Y/Y to $60.31 billion. GAAP EPS topped $3.56, which, at a recent price of around $248 values the stock at 17.4 times earnings. Markets are realizing the risks of a healthcare for all is dissipating. This will allow UNH to realize the benefits of the steady 5.7% CAGR in the healthcare market from 2000–2025.

UnitedHealth's Outlook

Even after UnitedHealth stock rebounded, investors who missed the rally may still buy the stock at a discount. At an adjusted EPS growth rate of 20% and enough cash flow growth to cover the dividend commitment, the stock has plenty of room to move higher.

Source: UnitedHealth

Management continues to demonstrate its willingness to reinvest profits back to the business through a return of capital and reinvesting in the business:

Source: UnitedHealth

In the first quarter, UNH bought back $3 billion out of the $4 billion-$5 billion planned buyback for the year. Now that the stock rose nearly 20% from its 52-week low set in April, the company may hold off buying more shares.

Source: finviz

Regardless of where the stock moves next, UnitedHealth has plenty of flexibility in how it may best invest the excess cash to maximize shareholder returns. So if the stock re-tests yearly lows, investors should not expect shares to stay too low for very long when the company buys shares at the lower prices.

Growth From Services

Services is the biggest driver of the business as UNH shifts its revenue mix away from Benefits. Although the revenue from International fell in the last few years, UNH is building its presence in South America. The company now serves over 6 million people in health benefits and expects revenue of $10.8 billion the full year 2019.

Optum’s importance runs counter to a Medicare for All proposal. The proposal also disrupts the relationship people have with their doctors and destabilizes the healthcare system. In effect, the cost of delivering healthcare will ultimately increase.

UnitedHealth continues to invest in the business to promote an interoperable digital infrastructure. By enabling the secure flow of information to the infrastructure, doctors may make and act on it and give proper clinical decisions. While UNH lowers the cost of healthcare, Americans benefit as do shareholders, as profits continue growing. In the first quarter, revenue from Optum grew 12% to $26.5 billion, with OptumHealth’s growth of 17%. With revenue of $75 billion from OptumHealth, UNH will enjoy a CAGR of 18% from OptumRx.

Backlog grew 14% while the people served on OptumHealth increased by 2 million in the first quarter.

Customer Growth

Customers are responding favorably to UNH’s practical innovations. Personalization and Navigation4Me for the senior population are some of the initiatives that are driving customer growth. Same-store growth resulted in a $5 billion revenue increase in the period while managed costs continue to be well-managed. UNH achieved an MCR (managed care ratio) of 82% in Q1 and expects the ratio to stay steady at 82.5% for the full year.

Valuation On UnitedHealth Shares

11 analysts on Wall Street offering a price target on UnitedHealth stock have an average price of $284, according to Tipranks. The more cautious investor may use a P/E Multiples model and pay no more than a 17–22 times price-earnings multiple. In this scenario, the stock trades at fair value and offers no additional upside from here.

Your Takeaway

UnitedHealth reminded investors after its most recent first quarter earnings report that its business is growing comfortably. It is winning healthcare plan deals, growing OptumRx and adding more customers to OptumHealth. The stock is trading somewhere between fair value and a discount of over 10% if the average analyst price target plays out.

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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.