After reaching a 52-week high heading into third-quarter earnings on October 15th, medical service plans company UnitedHealth Group (UNH) has pulled back nearly 7% in recent days. This opens the age-old question following a decline in a blue-chip stock’s share price: Could this be a buying opportunity?
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As I’ll dive into below, higher-than-expected medical costs and lower-than-expected guidance for 2025 led to an approximately 9% selloff of UNH stock. Since hitting its low, the stock found support right around the $560 range and has gained a bit from there. In my view, this partial recovery is for good reason. Despite anticipated pressure in the coming quarters, I believe UnitedHealth Group could still be a smart buy. Let’s further explore why.
Q3 Results Were Fine
For the most part, UnitedHealth Group’s third-quarter earnings were acceptable, which is one of the reasons why I’m bullish. The company posted $100.8 billion in total revenue during the quarter, which was up 9.2% over the year-ago period.
However, UnitedHealth Group’s total medical membership fell by 4% year-over-year to 50.7 million people for the third quarter. Initially, this seems discouraging. Nevertheless, it’s important to underscore that UnitedHealth Group completed its divestiture of Brazil operations in February. Adjusting for this sale, medical membership would have marginally increased.
Importantly, greater insurance premiums and product revenue more than countered a declining membership count. In addition, UnitedHealth Group’s adjusted earnings per share (EPS) rose by 9% over the year-ago period to $7.15. It is worth noting that the company’s adjusted EPS growth rate lagged total revenue growth because of a 290-basis point increase in the medical care ratio to 85.2% for the quarter. This was caused by CMS Medicare funding reductions and higher medical claims.
UNH’s Outlook Remains Within Its Initial Range
Another reason why I’m bullish is UNH’s outlook. For 2024, UnitedHealth Group expects between $27.50 and $27.75 in adjusted diluted EPS. This is still within the initial range of between $27.50 and $28.00 established last year. For perspective, this would be a 10% growth rate over 2023.
Following Q3 earnings, UnitedHealth Group issued adjusted diluted EPS guidance of $30 for 2025. This came in below the analyst consensus of $31.17 but equates to an 8.6% growth rate over the 2024 analyst consensus.
Fortunately, obstacles likely won’t hold UnitedHealth Group back forever. The analyst consensus for 2026 is that adjusted diluted EPS will rise by 13.8% to $34.13. This would be in line with the 13% to 16% annual adjusted diluted EPS growth that UNH still thinks it can deliver long-term. Behind this outlook, the company assumes high single-digit annual revenue growth from both its UnitedHealthcare and Optum segments.
Outlook Seems Realistic
I believe UNH’s outlook is realistic because it is backed up by a forecast from market research firm Spherical Insights. The market research company anticipates that the global health insurance market will grow at a compound annual rate of 5% from $2 trillion in 2023 to $3.2 trillion in 2033.
As the industry leader with immense scale, it’s not unreasonable to assume that UnitedHealth Group can grow at a rate that is better than its industry. This is because its trusted reputation in the space can help win new business and execute bolt-on acquisitions to boost its market share over time.
In addition, modest annual improvements in the operating cost ratio through improved operating efficiency and share buybacks are more catalysts that can help UnitedHealth Group meet its EPS outlook. By improving efficiency, the company can generate more money and lead to larger share repurchases, which boosts the EPS figure even if overall profits stay flat. This is because it reduces the number of shares outstanding, meaning that each share will have a larger claim to the profits.
An A+ Balance Sheet
Another positive characteristic of UnitedHealth Group is its financial strength. As of September 30th, the company’s balance sheet had a net debt balance of just $40.9 billion. In absolute terms, that’s quite a bit of debt. However, for a top 10 component of the S&P 500 by market capitalization that generated more than $16 billion in free cash flow during the last 12 months, that’s a very manageable debt load. As a result, it has an A+ credit rating from S&P Global (SPGI) due to its stable outlook.
It is this financial strength that allows UNH to pay a 1.5% dividend yield that is better than the S&P 500’s 1.3% yield. Although this is not a particularly high yield, it is worth noting that the company’s payout ratio for 2024 is expected to be in the high 20% to low 30% range. This leaves it with a nice cushion to at least grow dividends as fast as earnings in the years ahead.
Therefore, if earnings do end up growing in the double-digit range, it is likely that dividends will too.
The Valuation Is Reasonable
UnitedHealth Group’s forward P/E ratio of 19.1 registers less than its 10-year average P/E ratio of 20.2. Given that UnitedHealth Group still has a viable path to double-digit annual EPS growth, this is a rational, if not slightly discounted valuation, in my opinion, which adds to my bullish thesis.
Is UNH Stock a Buy?
Looking at Wall Street’s opinion on the stock, UnitedHealth Group possesses a Strong Buy consensus rating. All 21 analysts have assigned Buy ratings to the stock in the last three months. After a 9% rally in its share price over the past year, the average UNH price target of $625.39 per share implies 10.8% upside potential.
Recap
UnitedHealth Group’s long-term growth profile remains intact. Since this is the case, the valuation looks to be attractive enough to potentially set the stock up for respectable returns from here. As a result, I’m beginning coverage with a buy rating.
