UnitedHealth’s 37.1% return over the past six months has outpaced the S&P 500 by 25.4%, and its stock price has climbed to $400.22 per share. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is now still a good time to buy UNH? Or are investors being too optimistic? Find out in our full research report, it’s free.
Why Does UNH Stock 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 Positive Attributes:
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 $450.1 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 19.2%, 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:
New Investments Fail to Bear Fruit as ROIC Declines
We like to invest in businesses with high returns, but the trend in a company’s ROIC can also be an early indicator of future business quality.
Unfortunately, UnitedHealth’s ROIC has decreased over the last few years. Only time will tell if its new bets can bear fruit and potentially reverse the trend.
Final Judgment
UnitedHealth’s positive characteristics outweigh the negatives, and with its shares outperforming the market lately, the stock trades at 18.8× forward P/E (or $400.22 per share). Is now the time to initiate a position? See for yourself in our full research report, it’s free.
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