UnitedHealth - Oversold and Undervalued
Valuemetrix
Disclaimer: This is in no way financial advice. I am not a financial advisor. Do your own research before making any final decision on investments.
UnitedHealth Group (Ticker: UNH) is one of the largest and most diversified healthcare companies in the world. Headquartered in Minnetonka, Minnesota, UNH operates across the healthcare spectrum through two primary segments: UnitedHealthcare, which provides health insurance coverage and benefits services, and Optum, which delivers information and technology-enabled health services. Serving millions of customers globally - including individuals, employers, governments, and healthcare providers - UNH is a cornerstone of the modern healthcare industry.
Despite its commanding presence, UNH stock has faced volatility in recent years, driven by shifting healthcare regulations, political debates over policy, and economic factors influencing healthcare spending. Nevertheless, the company’s resilience shines through, bolstered by robust financial performance and forward-thinking strategies that make it an attractive investment opportunity.
UnitedHealth Group’s stock price has been pushed down around 28% from it’s all-time high by a few separate forces. Regulatory changes, such as adjustments to Medicare and Medicaid or discussions around a single-payer system, introduce uncertainty. Political debates, especially during election cycles, amplify this volatility, with proposals like Medicare for All having the potential to reshape the insurance industry massively.
Economic conditions also play a role; recessions or shifts in employment can reduce healthcare spending or alter enrolment in employer-sponsored plans. UNH’s diversified operations and consistent growth have helped it weather these challenges fairly effectively thus far.
The very public murder of Brian Thompson in December 2024 also shined a light on some of the companies practices to the average person, which drove a massive rise in negative sentiment around the company. This has caused a decline in price which is unjustified in my eyes. The company has grown it’s intrinsic value as it’s valuation has declined. This is where we swoop in as value investors.
UNH’s strength lies in its diversified business model, which spans the healthcare value chain and ensures stable cash flows:
- UnitedHealthcare: Offers a broad portfolio of insurance plans, including employer-sponsored, Medicare, and Medicaid options. This segment thrives on rising demand, particularly in the fast-growing Medicare Advantage market.
- Optum: Encompasses pharmacy care services, data analytics, and technology solutions. Optum capitalizes on the need for cost-efficient healthcare and the shift toward digital health innovations.
This dual-segment approach provides resilience, allowing UNH to perform well even in uncertain economic climates.
UnitedHealth Group is aggressively positioning itself for the future with investments in high-potential areas:
- Medicare Advantage: As the U.S. population ages, UNH is a leader in this expanding market, with enrolment expected to climb steadily.
- Optum’s Technology and Analytics: Heavy spending on data analytics and artificial intelligence is transforming healthcare delivery and cost management.
- Acquisitions: Strategic buys, like the acquisition of Change Healthcare in 2021, bolster UNH’s health IT capabilities and broaden its reach and diversification.
These moves align UNH with the evolving needs of the healthcare sector, promising sustained growth.
UNH has historically delivered impressive financial results, reflecting the growing demand for healthcare services. Revenue has surged from around $201 billion in 2017 to $400 billion in 2024, doubling in just seven years! This is remarkable growth.
Earnings per share (EPS) have followed suit, rising from $10.95 in 2017 to $24.12 in 2023. That being said EPS declined in 2024, largely due to a ransomware attack targeted Change Healthcare in February of 2024. Increased Medical Costs and Higher Medical Care Ratio also contributed though, which is more concerning but we will address this later.
Free cash flow has also seen rapid growth over the last decade, fuelling both growth initiatives and shareholder returns. While it dipped in 2024 I am confident management will recover strongly over the next couple of years.
The upward trajectory in these metrics demonstrates well UNH’s financial health and operational efficiency. While 2024 did see declines, this looks like an outlier for UNH to me, and I think we can expect them to return to their long-term performance trends in the near
UnitedHealth Group prioritises rewarding its investors. It has raised its dividend for 13 consecutive years, earning a current yield of around 1.82%—respectable for a growth-oriented company. Additionally, UNH has repurchased enormous amounts of its shares over the past five years, shrinking its share count and boosting EPS.
This combination of dividends and buybacks shows management’s confidence and commitment to shareholder value. It also shows they believe the stock is perpetually undervalued, constantly buying back shares. I really like these traits in a company, and every shareholder wants to see management as friendly to investors as this.
UNH’s competitive edge over it’s competitors is large. Its massive size grants cost advantages and negotiating power with providers and suppliers. Optum’s cutting-edge analytics and tech platforms deliver insights that enhance care and also cut costs for the company. By uniting insurance and health services, UNH can optimise patient outcomes and profitability in ways competitors struggle to replicate.
These strengths create a high barrier to entry, meaning UNH’s dominance is near untouchable. It is as strong of a moat as you can get in an industry like healthcare.
This sounds like a great company so far. It is always important to look at the future risks facing the company however, so let’s take a look:
Despite its strengths, UNH faces a couple notable risks:
A shift toward a single-payer healthcare system or significant changes to Medicare rates poses a substantial risk to UnitedHealth Group's (UNH) profitability. In a single-payer system, the government would become the primary payer for healthcare services, likely leading to standardised and potentially lower reimbursement rates for insurers and providers. This would directly impact UNH's revenue, particularly in its UnitedHealthcare segment, which relies heavily on premiums and reimbursements from government programs like Medicare and Medicaid. While it seems very unlikely Trump would make a change of this nature, a future president may be more open to the idea, which would be bad news for UNH.
Similarly, altered Medicare rates, such as reduced reimbursements for Medicare Advantage plans, could compress margins by lowering the payments UNH receives for covering seniors—a key and growing market. The effect on UNH could include reduced earnings, slower growth, and pressure on its stock price due to squeezed profit margins, especially if operational costs cannot be reduced proportionally.
To mitigate this risk, I hope to see UNH's management make attempts to diversify revenue streams by expanding into areas less reliant on government reimbursements, such as international markets or direct-to-consumer health services.
The healthcare insurance and services sector is highly competitive, with rivals like CVS Health and Cigna aggressively pursuing market share through acquisitions, innovation, and vertical integration. For example, CVS Health has expanded its healthcare footprint by acquiring Aetna and leveraging its retail pharmacy network to offer integrated care solutions, while Cigna has strengthened its position in pharmacy benefits management through its merger with Express Scripts.
This intensifying competition could erode UNH's market share, particularly in key areas like Medicare Advantage, employer-sponsored plans, and pharmacy services, leading to slower growth, pricing pressure, or loss of customers to competitors offering more attractive services or lower costs.
While competition is inevitable, UNH's strong brand, extensive provider network, and technological leadership through Optum position it well to hold off rivals for now. However, management must remain proactive in adapting to the evolving competitive landscape to sustain its market position, even with all the negative sentiment surrounding the company at the moment.
UnitedHealth Group is a well-managed titan in the healthcare sector, with a diversified business model, strong financial trends, and a clear focus on shareholder returns. While the healthcare industry grapples with regulatory and economic uncertainties, UNH’s long-term strategy and sustainable competitive advantage both position it for future success.
The healthcare market as a whole also looks undervalued to me at the moment, and with populations aging and institutional investors possibly looking to become more risk-off in the volatile market of 2025, UNH is attractive as a buying opportunity in possibly the most undervalued sector in the market.
At its current valuation, UNH stock offers appeal to both growth and income investors. Its leadership in booming areas like Medicare Advantage and health technology, paired with steady cash flow generation, makes it a standout choice. If a steadily growing, shareholder-friendly business fits your investment strategy (which it probably does), UNH looks like a strong buy to me. Do you agree?
Thank you for reading, and have a great day!