Trefis Team
Contributor|Jul
20, 2020,08:00am EDT
UnitedHealth’s
stock (NYSE: UNH) lost more than 33% - dropping
from $292 at the beginning of the year to below $195 in late March - then
spiked 57% to around $307 now. That means it has fully recovered to the levels
where it started the year.
Why? While the
Covid-19 outbreak and associated lockdowns resulted in an uncertain outlook for
the broader markets, the multi-billion-dollar Fed stimulus announced in late
March helped the markets stage a strong recovery. Investors are now expecting a
quicker economic rebound, which will bode well for UnitedHealth. In addition,
the company posted a strong Q2, led by lower Medical Costs in the wake of
deferred elective surgeries.
But is this all
there is to the story?
Not quite. Despite
the recent rally, Trefis estimates s Valuation at
about $350 per share, roughly 15% above the current market price based on two
key opportunities.
The first
opportunity we see is to UnitedHealth’s
Revenue growth in the near-to-medium term. With the economy
barely limping back to normalcy following Covid-19 related shutdowns, and
unemployment at multi-decade highs in the U.S., the government sponsored health
insurance enrollments are expected to increase. Also, UnitedHealth for now is
benefiting from the postponement of elective surgeries, as it has to bear the
costs of such surgeries. In fact, this factor primarily led to a 2x jump in the
company’s Q2 profits compared to the prior year quarter. That said, this benefit
could be limited only to a couple of quarters and the trend will reverse as the
economies open up and elective surgeries are attended to. UnitedHealth
Expenses dashboard provides more details on the company’s
different expense items. The company re-affirmed its guidance for the full
year, providing more clarity on its revenues in times of uncertainty. We
project that UnitedHealth’s net revenue will stand at about $258 billion for
2020, marking a 6.6% y-o-y growth. This compares with the growth rate of 12.5%
in 2018, and 7.0% in 2019.
The second key
opportunity stems from UnitedHealth’s attractive valuation multiple, compared
to its own historical multiple over the recent years. The stock now trades at
under 19x its projected 2020 adjusted earnings per share of about $16.45. In
comparison, to earn close to $16 per year from a bank, you’d have to deposit
about $1,600 in a savings account today (assuming 1% interest rate), so about
100x desired earnings. At UnitedHealth’s current share price of roughly $307,
we are talking about a P/E multiple of just under 19x, compared to 21x seen in
2017 and a little under 20x in 2019. And we think a figure closer to 21x, which
is toward the higher end of the range seen over the recent years, will be
appropriate.
That said, there is
a near term risk in the company’s UnitedHealth Employer & Individual
segment.
Given the current
Covid-19 pandemic, there has been a significant increase in unemployment, which
in turn has impacted the company’s Employer & Individual health insurance
segment. Though higher unemployment will translate into increased enrollments
in government sponsored health insurance plans, the corporate plans usually
garner higher margins. The impact on this business was evident from Q2 results,
with segment sales dropping 8% to around $13 billion. But, as economies
gradually open up, and the risks associated with Covid-19 abates, there will
likely be an uptake in corporate plans as well. That said, the rebound in
economic growth and its timing hinge on the broader containment of the
coronavirus spread. Our dashboard forecasting U.S. Covid-19
cases with cross-country comparisons analyzes expected recovery
time-frames and possible spread of the virus. Further, our dashboard -28% Coronavirus
crash vs. 4 Historic crashes builds a complete macro picture.
The complete set of coronavirus
impact and timing analyses is available here. For UnitedHealth
the key trend to watch out for will be the Medical Costs in Q3, as elective
surgeries gain pace over the coming months.
While UnitedHealth
stock looks like it can gain more, which S&P 500 component stocks can
outperform? TDG, INTU, ROST,
FISV are consistent outperformers.
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