1/ $UnitedHealth(UNH)$ was once a market darling, now everybody hates it.
Yet, revenues keep growing, it still dominates the industry and margins are set to expand.
Here is why UNH is an asymmetric opportunity now: 🧵
2/ UNH is dominating the healthcare in the US.
Its stock has appreciated 981x since 1985.
How the hell UNH achieved this while other helthcare groups like $CVS Health(CVS)$ appreciated only 9x in the same period.
The answer is its structure.
It's vertically integrated.
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3/ It's a full-stack healthcare company.
It has two main businesses: UnitedHealthcare and Optum.
UnitedHealthcare provides health insurance while Optum provides the care services and pharmacy benefit management.
This allows UNH to have operating leverage.
Here is how:
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4/ Most of the payments made by UnitedHealthcare could be seen as an internal capital allocation.
Clients pay premiums to UnitedHealthcare.
When they need care, they primarily use Optum, and UNH pays Optum for their care.
This way it double capitalizes on the premiums paid.
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5/ Optum doesn't just provide it with operating leverage, it also brings in significant external revenue.
Many other insurers and employers also use Optum's care network and pharmacy benefit management.
This generates significant external revenue.
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6/ This model has worked incredibly well for UNH.
Despite being the largest health insurer in the world, it has grown revenue 11% annually in the last 5 years.
In the last quarter, it added a record 700,000 clients.
This is an amazing business performance by any means.
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7/ Why has the stock plummeted then?
There are two main reasons:
- Declining profitability.
- Concerns over compliance.
Medical costs have increased beyond its estimates since the Q3 2023.
This gradually reduced its net margins and led it to miss guidance last quarter.
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8/ Other reason is compliance.
It received heightened media scrutiny since the murder of the CEO of its insurance arm.
WSJ repeatedly came up with articles accusing UNH of irregularities.
Yet most of these news, especially the government investigation is old.
UNH has successfully passed all government audits so far and DOJ had concluded that there wasn't enough evidence warrant a full fledged investigation for shady business practices.
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9/ I believe these headwinds are temporary.
As the largest health insurer, it's normal for UNH to receive media and regulatory scrutiny.
It has passed all these scrutiny without any tangible finding of crime so far. I don't think this will chance.
Second, UNH can fix its business easily.
They were already pretty successful in estimating costs and pricing accordingly before Q3 2023.
I think they can easily back to growth by implementing stricter underwriting and bidding up for 2026.
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10/ Valuation is amazingly attractive.
It's currently trading at 11 times forward earnings.
Even if EPS remains flat this year and we assume only 13% annual growth for the next 5 years, it's EPS will reach $44 by the end of 2030.
At 15 times earnings, we will have a $660 stock.
This is more than double of the today's price.
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