Shares of UnitedHealth Group have experienced an epic sell-off over the last month.
With shares down by more than 40%, UnitedHealth Group (UNH 2.50%) is the poorest-performing stock in the Dow Jones Industrial Average so far this year.
Over the last month or so, there has been no shortage of storylines surrounding America’s largest health insurers. And if the share price movements are any indication, most of the news isn’t great.
Let’s dig into what has driven UnitedHealth stock off a cliff, and explore whether or not it remains a good buy for long-term investors.
What is going on at UnitedHealth?
A significant influence on a stock price, at least over the short term, is how a company’s quarterly earnings are perceived. Generally speaking, if a company beats Wall Street estimates or raises its outlook, shares rise. On the other hand, if investors aren’t impressed by the company’s performance, they may choose to sell the stock.
During UnitedHealth’s fourth-quarter and full-year 2024 earnings call in January, management issued earnings guidance of $28.15 to $28.65 per share.
Things took an unexpected turn when it reported first-quarter earnings on April 17. Management is now guiding in the range of $24.65 to $25.15 for earnings per share (EPS).
Two primary factors contributed to the downward revision. First, utilization rates from the company’s Medicare Advantage businesses were higher than management was forecasting. These dynamics increase near-term costs, thereby stifling profitability.
Second, the company’s Optum Health division — which serves as a pharmacy benefits manager — has been struggling on reimbursement due to a combination of cuts to Medicare as well as changes in insurance plans in certain market demographics.
Unfortunately for investors, UnitedHealth’s drama didn’t stop at the operational hiccups detailed above. About a month after the first-quarter earnings report, the company announced that CEO Andrew Witty had resigned.
If this weren’t enough to get investors hitting the panic button, The Wall Street Journal followed up that news with a report that UnitedHealth was under investigation from the Department of Justice (DOJ) regarding fraudulent activity in Medicare billing.
Management was quick to deny these claims and called the report “deeply irresponsible.”
Image Source: Getty Images.
UnitedHealth’s valuation is getting clobbered
As of this writing (June 3), shares are trading around $300, near a five-year low.
UNH PE Ratio (Forward) data by YCharts.
The graph above shows that UnitedHealth is valued right in between insurance giants Humana and Cigna on a forward price-to-earnings (P/E) basis.
Is the stock a buy right now?
Just a month ago, the company’s forward P/E was roughly twice as high as now and trading for a premium compared to the competition. Given the extreme valuation compression over the last several weeks, I am inclined to think much (if not all) of the bad news is priced into the stock already.
A downward revision in guidance and changes in management are the main talking points surrounding UnitedHealth at the moment. But in the company’s first-quarter earnings release and the the announcement of Witty’s resignation, management added that the company should return to growth by next year.
The company’s new CEO, Stephen Hemsley, purchased $25 million in UnitedHealth stock following the sell-off last month. This was met with another $6.6 million of insider buys from other executives. I think this signals confidence in the company’s long-term prospects. In my view, these insider buys suggest management believes that UnitedHealth is poised to return to growth.
While the near-term price action might continue exhibiting some volatility, I think the shares remain a solid opportunity for long-term investors. Given the valuation trends explored in this article, I think now is an opportunity to buy the dip in UnitedHealth Group stock at a bargain valuation.
