anti
United Health Group (NYSE: UNH) is the world’s largest healthcare company in terms of market capitalization and revenue. Its main business is the healthcare insurance segment, but his Optum segment of his UNH, which provides care provision, pharmacy services and health tech solutions. Analytics, payments, and clinic and hospital management platforms are key value creators for the company. The company’s stock price has fallen like other healthcare companies, and will be below the market in 2023. The drop provided a rare opportunity to buy his UNH at a P/E ratio of 19.43 to projected earnings in 2023, well below the company’s stock price.5-year average P/E ratio of 23.6Based on the DCF model and multiple analyses, we found the stock to be fairly valued at $664. Therefore, I think UNH is a strong buy.
Company Profile
UNH operates in the United States as a diversified healthcare company. The company operates through four segments: UnitedHealthcare, Optum Health, Optum RX and Optum Insight. UnitedHealthcare is an insurance company. It serves individuals, employers, Medicare and Medicaid beneficiaries, and provides healthcare benefits worldwide. Optum Health is a national healthcare delivery platform that engages people in home and virtual clinical settings to provide primary, specialty, surgical, and emergency care. Optum Insight works with health tech, providing analytics, payment and management technology across health systems. Optum Rx provides pharmacy care services through a network of over 67,000 retail pharmacies.
As shown below, the higher-margin segments outpaced the growth of the lower-margin segments.
Prepared by the authors based on UNH financial reports
Long-term guidance and management
According to management’s long-term guidance provided at Investor Day 2022, the UnitedHealthcare segment is projected to have a margin of approximately 5.5% going forward. Optum Health and Optum Insight are projected to post double-digit revenue growth with operating margins of 9.0% and 20.0%, respectively. Optum Rx is projected to grow revenue by 6.5% at the midpoint, with an operating margin of 4.0%. Management also reaffirmed its long-term guidance of consolidated EPS annual growth of 13%-16%.
One thing that stands out is the ambition of UNH’s management. Investors are strongly encouraged to watch the company’s investor his day webcast. This is a company with a market capitalization of almost $0.5 trillion, but its management team is the most dedicated and innovative I have seen. They don’t spend his 50% of his day with investors talking about sustainability efforts or other his ESG issues. They are talking about new products and regions. They set very ambitious goals for a company of this size and detail strategies for achieving them. In that regard, I believe the company’s management definitely justifies the premium.
Competitors and Multiple Analysis
UNH often partners with other major health insurers such as CVS Health (CVS), Humana (HUM) and Elevance Health (ELV). In reality, UNH is a unique asset in the healthcare sector due to its large scale and diversified business. The group operates the largest health insurance company in the United States. The company operates a large network of healthcare providers in his Optum Health, while competitors such as CVS are just beginning to build out primary care capabilities through his M&A. Additionally, UNH operates one of the largest pharmacy services in Optum RX, while companies like Amazon (AMZN) are just entering the space. More importantly, no other health insurer owns assets like Optum Insight’s EBIT margin exceeds 20%.
We need to understand the synergies in the UNH project. The company is not only able to provide its customers with the best healthcare services, but also through a true value-based approach because of its presence across the value chain. You can demonstrate and acquire third party customers for Optum Business.
It’s not surprising that when you look at your healthcare peers, the UNH multiples seem inflated. No wonder UNH has surpassed all other companies in total return over the past decade.
Created by the author using data from Seeking Alpha. Data as of February 26, 2023
The bottom line here is that I believe UNH’s premium is more than justified. The only reality comparable to UNH is UNH itself. Over the past five years, UNH’s average P/E multiple was 22.3. In times of rising interest rates and worsening economic conditions, multiple contractions are inevitable. That said, I believe that a patient investor will be rewarded more than just buying UNH at its current price.
Valuations and short-term forecasts
A discounted cash flow methodology was used to assess the fair value of UNH. UNH expects revenue to grow at a CAGR of 8.78% between 2022 and 2028. This is due to the company’s segment-by-segment long-term guidance. We believe revenue will grow at this pace due to backlog fulfillment at Optum Insight and the company’s ability to maintain or grow market share in all other segments. EBITDA margin is expected to remain stable at around 9.8% as higher MBR ratios are offset by earnings mix and higher margin segment growth. Overall, my assumption is that his EBITDA will increase at the same pace of earnings. This is slightly below management’s guidance at Investor Day of his 10.0% increase in operating income. In my opinion, management’s long-term EPS guidance of 13.0% to 16.0% will be met, but we expect the buyback contribution to exceed 3.0%.
Prepared by authors based on UNH financial reports and authors’ projections
Assuming a WACC of 8.75%, the fair value of UNH is estimated at $620.1 billion. This is a 37% increase compared to the market value on the date of writing. While this represents a high P/E multiple (26.6) to earnings in 2023, I believe UNH is due to a significant multiple expansion based on the quality of its growth drivers and the stability provided by its traditional businesses. I’m here.
Short-term forecast
In the short term, I think the consensus is slightly off. For some reason, UNH doesn’t get enough credit for its own guidance and consistently beating market expectations, which she has done every year since 2008. Alpha he is $359.2 billion. In my opinion, UNH is trying to defeat the guidance again. Specifically, for 2023, he forecasts $367 billion in revenue ($6 billion above guidance), compared to the consensus $89.7 billion, with Q1-23 revenue of $90.1 billion. I am predicting. My EBIT forecast for this year is $32.3 billion versus the guidance midpoint of $31.8 billion, compared to the consensus $5.4 billion earnings forecast of $5.7 billion for Q1-23. is. My forecasts are primarily based on historical seasonality, using Q4 2022 and Q1 2022 as baselines. We also expect margins to improve in the first quarter of 2023 due to the early flu season. After the May close, we’ll find out who got closer to the actual results and update the model accordingly.
risk
Increasing MCR ratios are always a concern when talking about health insurance companies. In UNH’s latest earnings call and investor day, he sees that this is a concern for some market participants, based on the attention MCR has received. In that regard, we advise each investor to ignore quarter-to-quarter fluctuations in the MCR. It is true that his MCR of 82.8% in Q4 2022 is higher than his MCR in the past.
Created by the authors using data from the UNH 10-K report
However, MCR is higher during flu spikes. The 2022 flu season arrived a little early, which is why the aforementioned increase occurred. According to company management, this is neither surprising nor concerning.
Throughout the pandemic, we’ve been referring to baselines and such. It’s been three years since this pandemic started, but as COVID weakens, we want to anchor our expectations more. And I’m most encouraged that the fourth quarter went as expected. And heading into 2023, what we’ve set in price trends lines up very well.
As I suggested at the investor meeting in response to your comment on the flu, we certainly saw that surge. As we moved forward, I think it started to decline after 5 straight weeks here. So having it come out like we expected it to is not really a meaningful impact as I’m looking forward to what we had planned.
— Brian Thompson, CEO, UnitedHealthcare, Q4 2022 Earnings Call
Another cause for concern is increasing competition in the healthcare segment, which UNH currently dominates. We see outsiders like Amazon trying to enter the space, and we see older competitors like CVS trying to diversify its capabilities. I’m sure there’s more competitive pressure, but it’s important to note that most of what we’re seeing is actually consolidation. (OSH) and Signify Health (SGFY), among others, and are competing with 1Life Healthcare (ONEM), which has already been acquired by Amazon. We do not expect UNH to lose market share anytime soon. We also believe that the healthcare “pie” will continue to grow.
Conclusion
UnitedHealth Group is more than just a leading health insurance company in the United States. Ancillary health businesses under its Optum segment are growing rapidly with better margins, differentiating UNH from its peers. may look like However, when compared to itself, the PER shows the stock is undervalued at the moment. At a fair value of $664, which is % over, I think it’s a strong buyer.
