UnitedHealth Group (UNH) cratered after reporting earnings that badly missed analyst expectations on the top and bottom lines. UNH stock has lost nearly 30% of its value in the past week after it missed Wall Street’s revenue estimate by $2 billion and earnings by $0.09 per share. It was one of the biggest one-day drops in the health insurer’s history.

Many analysts responded by either lowering their price targets or downgrading their rating on the stock. While no one moved to suggest the stock is a sell, a number no longer think the stock is a buy.

That is a big mistake, but it opens up a fantastic opportunity for long-term investors to buy UNH stock.

One Step Back
UnitedHealth reported earnings of $7.20 per share on revenue of $109.58 billion. That fell well short of Wall Street expectations of $111.6 billion in revenue and EPS of $7.29. Worse might have been UnitedHealth revising lower its full-year adjusted earnings guidance to $26 and $26.50 per share, a 13% miss at the midpoint compared to analyst estimates of $29.74 per share.

Of the 11 analysts that took action after earnings came out, not one took no action. Of the ones that lowered their price target, they reduced their view by an average of 14%. While UNH stock is still a buy with a consensus $603 per share target, implying 44% upside, the mass panic ignores the insurer’s long-term potential.

Two Steps Forward
UnitedHealth is a reliable and consistent performer, steadily growing revenue, profits, and dividends.

While it suffered a big drop in profits last year, the insurer was still operating to form. Revenue grew 9% in 2024, and though profits took a big hit, that was because of the major ransomware attack it suffered.

The hack cot it $2.2 billion in direct costs plus an additional $867 million at its OptumRx business. It expects to incur additional costs in 2025, but at a lower rate. Overall, UnitedHealth’ business continues operating very well.

While first-quarter revenue was below analyst expectations, it was still up 9.8% year-over-year, while profits grew 5.7%, as it dealt with changes to the Medicare Part D program. Last year’s blip was essentially a one-off hiccup that should iron itself out. Indeed, the Medicare changes may already be resolved.

Long-Term Growth
In January, the Centers for Medicare and Medicaid Services (CMS) published its initial rate notice for the Medicare Advantage program that provides Part A (hospital insurance) and Part B (medical insurance) benefits to people with Medicare. The insurance plans are run by private health insurers like UNH that are reimbursed for expenses by the government.

Medicare Advantage pays the insurers the same rates the traditional Medicare program pays to provide benefits on a risk-adjusted basis. The insurers then provide services to improve the health of customers at lower cost, and profit from the difference.

At the time, CMS said it anticipated a reimbursement rate of 2.23%, which would have a severe impact on insurers like Humana (HUM) and CVS Health (CVS), not just UnitedHealth.

However, when CMS released its final reimbursement rate notice, it was at a significantly higher rate than expected. The reimbursement rate would instead be 5.06%, even after risk-related adjustments.

So, although UNH is forecasting earnings of around $26 per share this year, it is above the $24.12 per share it recorded in 2023. UnitedHealth, despite the issues it faced, is still growing profits. This is not a situation where its earnings fell and will keep falling.

If you examine what Wall Street forecasts, analysts project UNH will grow profits at around 15% annually for the next few years and still expand at double digit rates afterward.

Dividend Growth Powerhouse
That bodes well for UNH’s dividend, too. The health insurer’s payout yields 2%, which is one of its highest rates in the past decade. But because UnitedHealth generates fistfuls of free cash flow – $20 billion in 2024 – the FCF payout ratio is just 36%, meaning there is plenty of room for further increases.

UnitedHealth Group has paid a dividend since 1990 and grown the payout every year for the last 22 years. It’s on the cusp of becoming a Dividend Aristocrat. Moreover, for at least the past 10 years, UNH has increased the dividend at a compounded rate of 16% annually.

Because UNH trades at just 13 times next year’s earnings, a fraction of its sales, and at 15x FCF, the stock is greatly undervalued. With the stock at levels not seen since 2019, it’s why Wall Street is completely wrong about UnitedHealth Group and why you should buy.

— Rich Duprey

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Source: Money Morning