UnitedHealth’s 24.5% return over the past six months has outpaced the S&P 500 by 16.7%, and its stock price has climbed to $407.86 per share. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is now still a good time to buy UNH? Or are investors being too optimistic? Find out in our full research report, it’s free.
Why Does UNH Stock Spark Debate?
With over 100 million people served across its various businesses and a workforce of more than 400,000, UnitedHealth Group (NYSE: UNH) operates a health insurance business and Optum, a healthcare services division that provides everything from pharmacy benefits to primary care.
Two Things to Like:
1. Economies of Scale Give It Negotiating Leverage with Suppliers
Larger companies benefit from economies of scale, where fixed costs like infrastructure, technology, and administration are spread over a higher volume of goods or services, reducing the cost per unit. Scale can also lead to bargaining power with suppliers, greater brand recognition, and more investment firepower. A virtuous cycle can ensue if a scaled company plays its cards right.
With $449.7 billion in revenue over the past 12 months, UnitedHealth is one of the most scaled enterprises in healthcare. This is particularly important because health insurance providers companies are volume-driven businesses due to their low margins.
2. Stellar ROIC Showcases Lucrative Growth Opportunities
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
UnitedHealth’s five-year average ROIC was 19.4%, beating other healthcare companies by a wide margin. This illustrates its management team’s ability to invest in attractive growth opportunities and produce tangible results for shareholders.
One Reason to Be Careful:
EPS Trending Down
Analyzing the long-term change in earnings per share (EPS) shows whether a company’s incremental sales were profitable — for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for UnitedHealth, its EPS declined by 2.4% annually over the last five years while its revenue grew by 11.3%. This tells us the company became less profitable on a per-share basis as it expanded.
Final Judgment
UnitedHealth’s positive characteristics outweigh the negatives, and with its shares topping the market in recent months, the stock trades at 21.4× forward P/E (or $407.86 per share). Is now the right time to buy? See for yourself in our in-depth research report, it’s free.
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