Medicare and Medicaid Setback
UnitedHealth stock (NYSE: UNH) experienced a significant blow on April 2, plunging by 6% after the U.S. Centers for Medicare & Medicaid Services announced a mere 3.7% rise in Medicare Advantage payments for 2025, falling below market expectations. This news was not well-received by investors, causing a ripple effect across healthcare providers, including competitors like Humana, Molina Healthcare, and CVS Health. The entire sector was already grappling with escalating medical costs, as evidenced by UnitedHealth’s medical costs to benefits ratio (MBR) spiking to 85% in Q4’23 from 83% in the previous year. The adverse MBR trend alarmed investors, leading to a 5% drop in UNH stock post-Q4 results. Consequently, the stock has plummeted nearly 15% year-to-date.
Historical Performance Trends
Examining a slightly longer timeline, UNH stock displayed robust growth of 30% from around $350 in early January 2021 to the current level of $460, outpacing the S&P 500’s 40% appreciation over the same three-year span. Nonetheless, UnitedHealth’s stock trajectory has lacked consistency. Annual returns for UNH were 43% in 2021, 6% in 2022, and -1% in 2023, contrasting with S&P 500 returns of 27% in 2021, -19% in 2022, and 24% in 2023, showcasing UNH’s underperformance relative to the broader market last year.
Future Outlook and Investment Thesis
In light of the uncertain macroeconomic landscape characterized by soaring oil prices and heightened interest rates, investors are left questioning whether UnitedHealth is destined for a repeat of its 2023 struggles, lagging behind the S&P 500 in the coming year. We posit that UNH stock is currently undervalued, with our valuation of UnitedHealth Group pegged at $605 per share, signaling a potential upside of over 30% from its current $460 price. Trading at under 17x forward expected earnings for 2024 at $27.70 per share, adjusted for the full year, compared to the historical average of 21x, UnitedHealth is maintaining an earnings outlook between $27.50 and $28.00 for 2024. Notably, despite escalating medical costs, the company stands firm on its earnings stance, fostering optimism in its business prospects. While short-term challenges persist, such as ballooning medical expenses and slightly disappointing Medicare Advantage payouts, we believe the negatives are adequately factored into the stock price. Consequently, investors can leverage this downturn as an entry point to position themselves for substantial long-term gains.
Peer Performance Metrics Comparison
Although UnitedHealth shows promise of scaling to higher levels, it is prudent to gauge the performance of its peers across critical metrics. Detailed insights on comparative company analysis and industry-wide benchmarking are available at Peer Comparisons.
| Returns | Apr 2024 MTD [1] | 2024 YTD [1] | 2017-24 Total [2] |
| UNH Return | -7% | -13% | 186% |
| S&P 500 Return | 0% | 10% | 134% |
| Trefis Reinforced Value Portfolio | -2% | 4% | 640% |
[1] Returns as of 4/3/2024
[2] Cumulative total returns since the end of 2016
Explore Trefis Market-Beating Portfolios to make informed investment decisions based on comprehensive analyses and price estimates.
The views and opinions expressed in this article are solely those of the author and do not necessarily reflect the views of Nasdaq, Inc.
