What a brutal six months it’s been for UnitedHealth. The stock has dropped 22.7% and now trades at $277.17, rattling many shareholders. This was partly driven by its softer quarterly results and might have investors contemplating their next move.
Given the weaker price action, is now a good time to buy UNH? Find out in our full research report, it’s free.
Why Does UnitedHealth 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 $447.6 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? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
UnitedHealth’s five-year average ROIC was 19.6%, 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 Growth Has Stalled
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.
UnitedHealth’s flat EPS over the last five years was below its 11.7% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded.
Final Judgment
UnitedHealth has huge potential even though it has some open questions. After the recent drawdown, the stock trades at 15.5× forward P/E (or $277.17 per share). Is now the right time to buy? See for yourself in our comprehensive research report, it’s free.
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