In a recent research note, Robert W. Baird analyst Michael Ha discussed three reasons to own UnitedHealth Group (UNH) stock now, following the company’s better-than-expected results for Q2 FY24. Shares of the American health insurance giant have gained over 11% since July 16, when the company reported its results before the market opened.
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Importantly, Ha lifted the price target on UNH stock to a new Street High of $640 from $597, which implies 11.6% upside potential from current levels. Let’s take a quick look at the catalysts.
- Q2 Hurdle is Behind Us: Interestingly, the analyst believes that the major hurdle of the Q2 results is cleared, and there is only a brighter path ahead for UNH to meet its long-term earnings growth target of 13%-16%. The impact of the Change Healthcare network outage due to a cyberattack has almost faded away, giving more clarity on future performance.
- UNH Shares are Undervalued: Currently, UNH stock trades at a 15% discount to the S&P 500 Index (SPX) in terms of the P/E (price-earnings per share) ratio. Ha believes that the post-election period will be beneficial for the stock price. In earlier three election cycles, the MCO (managed care organizations) group have outperformed the SPX by roughly 13%, thus closing the valuation gap between UNH shares and the SPX.
- Earnings Expected to Boost by 2025: Ha noted several tailwinds that will boost UNH’s earnings by 2025. These include the easing of medical loss ratios (MLR), an expected earnings ramp in Optum Health as 5 million patients convert to fully accountable lives, and an expected return to normal revenue growth in Optum Insight. Moreover, the analyst believes that with several large MA (Medicare Advantage) players expected to reduce their market presence next year, UNH can grow its market share with newer products in 2025.
Key Takeaways
Baird analyst raised the price target on UNH stock to $640 based on a 20.4x P/E multiple, which reflects the forecasted 2025 P/E of the S&P 500 index. The analyst’s bullish view is based on the premise that UnitedHealth has a competitive moat as it has the required large scale and the second or third market position in almost every health insurance business line. Plus, its Optum Health segment is poised to witness favorable growth owing to the tailwinds noted above.
With a quarterly dividend of $2.10 per share, UNH offers a dividend yield of 1.51%. The current valuation gap with the SPX seems like an apt time to own UNH stock, as the shares are expected to move higher.
