United Health Group Continues to Justify a Premium Valuation

Key Points

• UnitedHealth Group is holding onto gains after its positive earnings report. 
• This is happening as the broader market is selling off sharply on inflation concerns. 
• UNH stock trades at a premium to the sector and the market. 
• The data-forward company is attempting to use analytics to improve health outcomes. 

UnitedHealth Group (NYSE:UNH) stock is up 1.77% in late-day trading after reporting a double beat on third-quarter earnings. The gains would likely be higher but for the broader sell-off taking place in the market.  

At a time when investors are seeking value wherever they can find it, this is something that investors should take note of. However, it’s equally important to point out that United Health Group is trading at a premium to the healthcare sector. It does have the largest market cap in the sector so it may be worth it, and this article will attempt to explain why that may be.  

Business is Booming 

By any account, this was an exceptional report for United Health Group. Top-line revenue came in at $80.89 billion which was a 12% year-over-year (YOY) increase. The company cited double-digit growth in both its Optum and UnitedHealthcare units. 

On the bottom line, the results were even more impressive. The company posted earnings per share of $5.79, a 28% increase from the prior year.  

And the company’s 6.5% net margin was 16% higher than the prior year and higher than the 6.3% the company posted in the prior quarter. 

All of which is to state the obvious, demand for healthcare continues to grow.  

But if this is just about the growth of healthcare, investors may be able to find some other stocks that have a better valuation. For example, Cigna (NYSE:CI) is also delivering strong year-over-year revenue and earnings growth. But CI stock currently trades at about 17x earnings. UNH stock trades at a hefty 26.9x earnings.  

Know What You Own 

Through its Optum Labs business unit, United Health Group uses “cutting-edge analytic techniques to vast health care data sets.” Optum is attempting to address two key questions which have perplexed the industry for decades: 

• How do you measure effective care based on health outcomes? 
• How do you compensate providers who deliver quality care based on how a patient does in contrast to the traditional fee-for-service model? 

To that end, Optum is seeing growth in what it terms value-based payment arrangements. This means that providers can get paid more based on a how a patient does. 

And to further develop its leadership in the area of data analytics and further grow the area of value-based care, the company looks like a near lock to acquire Change Healthcare (NASDAQ:CHNG). Not only that, but acquisition such as these will help the company lower costs and expand its services.  

UNH is a Safe Stock to Ride Out this Market 

In a risk-off market, United Health Group is offering growth in a defensive sector. However, for all the good news that United Health Group is delivering, it’s only fair to note that the stock has climbed over 166% in the last five years. It’s fair to wonder how much growth is already factored into the stock price. 

On the other hand, over the last 12 months, UNH stock has still posted a gain of over 22%. But at two different points this year, an area around $247 has acted as firm resistance for the stock.  

Nevertheless, the analysts tracked by MarketBeat give UNH stock a consensus price target of $586.40 which is a 14% gain from the stock’s current level. However, that doesn’t reflect any upcoming upgrades. As of this writing, no analyst had offered an opinion after the company’s earnings report.  

And investors get a compelling dividend that currently pays $6.60 on an annual basis, has a 1.29% yield, and has been growing for the last 12 consecutive years.