Strategic Moves Amplify Revenue and Enhance Shareholder Value

What are the underlying business or industry changes driving this perspective?

• UnitedHealth Group operates as a diversified health care company in the United States.
• Rebounding from the Change Healthcare cyberattack: UnitedHealth Group's quick recovery from the cyberattack positions the company to restore its affected services fully by next year, which should positively impact future revenue and mitigate current disruptions.
• Medicare Advantage growth: The company’s strategic focus on Medicare Advantage, which currently saves consumers significantly, is expected to continue driving growth and potentially lower costs, improving net margins.
• New Medicaid contracts: The key wins in major states like Virginia, Texas, and Michigan, along with potential future RFPs, predict increased Medicaid membership that will boost revenues.
• Commercial segment growth: Strong performance in UnitedHealthcare’s commercial benefits, adding 2 million members in Q1, signals sustained growth and supports long-term revenue goals.
• Strength in Optum Health: Optum Health aims to serve more patients in value-based arrangements, and has seen increased engagement with complex patients, potentially leading to better health outcomes and future earnings stability.

How have these above catalysts been quantified?

• Analysts are assuming UnitedHealth Group's revenue will grow by 7.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.0% today to 6.5% in 3 years time.
• Analysts expect earnings to reach $30.7 billion (and earnings per share of $34.46) by about May 2027, up from $15.4 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $32.5 billion in earnings, and the most bearish expecting $26.3 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.6x on those 2027 earnings, down from 29.0x today. This future PE is lower than the current PE for the US Healthcare industry at 25.9x.
• Analysts expect the number of shares outstanding to decline by 1.1% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.06%, as per the Simply Wall St company report.

What could happen that would invalidate this narrative?

• Cyberattack on Change Healthcare led to significant costs and disruptions, negatively affecting quarterly earnings and revenue.
• Uncertainty about the full-year impact of the cyberattack, with estimated losses contributing to a potential drag on net profitability.
• Concerns over Medicare Advantage funding reductions and the ongoing need to adapt to these changes could pressure long-term margins and revenue growth.
• Dependency on successful resolution and customer restoration for Change Healthcare operations, which is critical to mitigating future business disruptions.
• Elevated medical cost trends, particularly in outpatient services and specialty Rx, remain a potential risk to managing medical expense ratios and overall cost control.