Yahoo Finance UnitedHealth (UNH) Stock Drops 8% YTD: Should You Hold or Fold?
Shares of the major healthcare plan provider UnitedHealth Group Incorporated UNH have slipped 8% in the year-to-date period, underperforming the industry’s decline of 5.7% due to multiple uncertainties arising from the business environment, cyberattacks, regulatory probes and other factors. In contrast, the S&P 500 index has experienced a robust gain of 14.6% over the same period, highlighting the stark divergence in performance. The stock is down 12.7% at this point from its 52-week high of $554.70.
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What's Weighing on UNH Stock?
UnitedHealth’s health service business, branded Optum, was affected by a cyber-attack on its Change Healthcare business in the first quarter. It was estimated to take a hit of around $1.6 billion from the attack. Furthermore, the breach has prompted the U.S. Department of Health and Human Services (HHS) to launch an investigation into the potential violations of patient data protection laws. Apart from the direct costs related to the hack, spending on cybersecurity is now expected to ramp up.
Moreover, in early April, as U.S. regulators held on to the rates for private Medicare plans for 2025, as provided in January, UNH witnessed a significant decline. Other health insurers, including Humana Inc. HUM and CVS Health Corporation CVS, also faced the brunt. As these companies are facing higher medical costs due to factors like vaccinations, higher utilization of services and others, lower-than-expected rates can lead to reduced margins. Medicare Advantage, being a major player in driving growth in this industry, companies rely heavily on these rate updates.
From a valuation perspective, UnitedHealth is trading at a premium compared to the industry average. The company's shares are currently priced at a forward price/earnings ratio of 16.60X, which is higher than the industry average of 15.05X.
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Despite its current overvaluation and the aforementioned challenges, we believe that these issues are likely to be temporary and pose minimal threats to UnitedHealth's long-term prospects.
UNH’s Promising Long-Term Prospects
Healthcare spending in the country is on the rise, and with increasing cases of diseases, the momentum will likely continue. As commercial business improves within the industry, UnitedHealth, with its diverse portfolio of offerings, is well-positioned to capitalize on the rising demand. This can help the company offset the lower-than-expected margins stemming from reduced rates for private Medicare plans.
Also, the company expects continued growth in Medicaid as it supports families and individuals with the redetermination process. Growing membership in its government business can be a major tailwind.
The Brazil divesture, which is likely to bring a minimal effect on the company in the short term, will improve the profitability of UNH’s portfolio in the long term. It will free up cash and enable it to focus on more profitable operations.
The company is diversifying its operations further by expanding into adjacent streams such as home healthcare and growing its analytics business. These initiatives aim to enhance value for partners and create additional partnership opportunities in the future. By focusing on AI and other tools, the company anticipates scaling its business and achieving long-term cost reductions, thereby improving overall efficiency.
Despite the impact of the cyber-attack, UNH is providing optimistic guidance for 2024, projecting adjusted net EPS in the range of $27.50 to $28.00. The midpoint of this range reflects a 10.5% increase from the 2023 figure of $25.12, underscoring the company's reliance on its operational resilience. The Zacks Consensus Estimate for 2024 adjusted earnings for UNH is currently pegged at $27.57 per share, indicating 9.8% year-over-year growth. The consensus mark for 2025 predicts a further 12.1% jump.
UNH benefits from robust cash flow, enabling it to pursue potential acquisitions and make shareholder value boosting efforts. In the first quarter of 2024 alone, the company returned $4.8 billion to shareholders through share repurchases and dividends. With a dividend yield of 1.7%, which exceeds the industry average of 1.5%, UnitedHealth has a history of consistent dividend increases since 2010.
Not the Time to Fold
Considering the company's massive size, ongoing expansion into targeted markets, and strategic efforts to diversify its operations further, we believe it may not be opportune to consider profit-taking at this juncture. Given the promising long-term prospects, maintaining a position in this Zacks Rank #3 (Hold) stock appears prudent at present. This stance reflects confidence in UnitedHealth's growth trajectory and its potential to deliver sustained value to investors over time. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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