Is United Overvalued?

By Admin•

United Health Group.png

Investment Thesis

UnitedHealth Group presents a rare opportunity to buy a dominant, cash-generative healthcare leader at a significant discount—offering substantial upside if regulatory and reputational headwinds subside.

Overview

Company Snapshot

  • Ticker: $UNH

  • Sector: Health Care Providers & Services

  • Founded: 1974

  • CEO: Stephen J. Hemsley (as of May 2025)

  • Market Cap: ~$255B

  • Current Share Price: $281

  • Annual Revenue: $410B (2024)

Growth Metrics

Revenue Growth

  • 11% CAGR since 2015, with acceleration to 12% CAGR over the past 3 years.

  • 8% YoY revenue growth in the latest fiscal year despite mounting sector headwinds.

Segment Breakdown

  • UnitedHealthcare: 74% of revenue, 5.3% operating margin.

  • Optum: 25% of revenue, but contributes 50%+ of operating income due to a higher 16.8% margin.

Optum is UnitedHealth's long-term growth engine. Since 2012:

  • Optum revenue: 25% CAGR

  • UnitedHealthcare: 9% CAGR

EPS & Free Cash Flow

  • EPS grew at 11% CAGR since 2015, including 19% CAGR between 2015 and 2023.

  • However, EPS dropped 35% in 2024 due to a cyberattack on Change Healthcare.

  • FCF followed a similar trajectory: 11% CAGR over the decade, despite a 17% YoY decline in the most recent year.

Context- collapse

From its all-time high of $630 in November 2024, shares have plunged 55%, erasing five years of gains. UNH is down 44% YTD—the worst performer in the Dow Jones Industrial Average. Key events behind the collapse:

1. CEO Assassination (Dec 2024)

The shocking assassination of UnitedHealthcare CEO Brian Thompson led to a 21% drop in shares. Though the stock rebounded, investor confidence was damaged.

2. Q1 2025 Earnings Miss

  • First miss since 2008.

  • EPS of $7.20 vs. $7.29 expected.

  • Driven by Medicare Advantage utilization spike and reimbursement headwinds at Optum.

3. CEO Resignation & Guidance Withdrawal

  • CEO Andrew Witty resigned in May 2025.

  • Guidance for 2025 was withdrawn, citing unpredictable care utilization trends.

4. Criminal Medicare Fraud Investigation

  • DOJ launched a criminal probe into Medicare Advantage billing practices.

  • Allegations include aggressive upcoding, controversial incentive structures, and possible overpayments.

5. Policy Risk: “One Big Beautiful Bill”

  • Introduced stricter billing oversight, spending cuts, and prior authorization reform.

  • Directly impacts Medicare Advantage economics.

6. Financial Engineering Concerns

  • Bloomberg reported quiet sales of internal business stakes to private equity to boost earnings.

  • Raises transparency concerns.

7. Employer Cost-Shifting Pressure

  • Rising premiums are prompting employers to reduce benefits or seek cheaper coverage—potentially eroding UnitedHealth’s top line.

The Bull Case

1. Allegations May Prove Overblown

  • In March 2025, a special master recommended dismissal of a whistleblower case alleging $2B in improper diagnosis coding.

  • UnitedHealth reaffirmed its practices have been validated by CMS audits.

  • It has committed to independent third-party oversight for added transparency.

2. Not Just a UNH Problem

  • Elevance and Centene have also cut guidance or withdrawn forecasts.

  • Broader MA (Medicare Advantage) pressures are driving down the entire sector.

  • Healthcare is trading at a 30-year low relative to the S&P 500 (per Goldman Sachs).

3. Drug Denial Rates Are Sector-Wide

  • UnitedHealth's denial rate (~23%) is consistent with industry averages.

  • Most rejected claims are ultimately approved after review.

4. Operational Adjustments

  • Raised medical cost ratio guidance to 87.5% to better price 2026 plans.

  • Reduced broker commissions to manage Medicare Advantage enrollments.

  • Exploring a $1B Latin America divestiture to sharpen focus on core U.S. operations.

5. 2026 Medicare Advantage Rate Increase

  • CMS approved a 5.06% rate hike for 2026—more than double initial expectations.

  • Provides a meaningful tailwind to both revenue and margins.

6. Veteran CEO Returns

  • Stephen Hemsley, who led UNH from 2006–2017, has returned as CEO.

  • His tenure saw robust growth and resilience through the GFC.

  • Reinstatement signals board confidence and a strategic reset.

7. Insider & Congressional Buying

  • May 2025:

    • Hemsley purchased $25M worth of shares at ~$289.

    • CFO John Rex bought $5M.

    • Members of Congress (e.g., Marjorie Taylor Greene) disclosed purchases.

8. Structural Resilience

  • UNH’s U.S.-centric model insulates it from tariffs, geopolitical shocks, and FX volatility.

  • Healthcare demand is inelastic, offering downturn resistance.

9. Capital Return

  • Dividend Yield: 3.2% (highest in over a decade).

  • Dividend Growth: 18% CAGR since 2015.

  • Buybacks: $9B in 2024 alone, boosting EPS and supporting the stock.