UnitedHealth Group Incorporated (NYSE:UNH) Held Back By Insufficient Growth Even After Shares Climb 30%

UnitedHealth Group Incorporated (NYSE:UNH) shares have had a really impressive month, gaining 30% after a shaky period beforehand. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 47% in the last twelve months.

Even after such a large jump in price, UnitedHealth Group's price-to-earnings (or "P/E") ratio of 13.2x might still make it look like a buy right now compared to the market in the United States, where around half of the companies have P/E ratios above 20x and even P/E's above 35x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

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Recent times have been advantageous for UnitedHealth Group as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

See our latest analysis for UnitedHealth Group

If you'd like to see what analysts are forecasting going forward, you should check out our free report on UnitedHealth Group.

Is There Any Growth For UnitedHealth Group?

There's an inherent assumption that a company should underperform the market for P/E ratios like UnitedHealth Group's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 52%. As a result, it also grew EPS by 21% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 1.3% per annum as estimated by the analysts watching the company. That's not great when the rest of the market is expected to grow by 11% each year.

With this information, we are not surprised that UnitedHealth Group is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Key Takeaway

UnitedHealth Group's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that UnitedHealth Group maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for UnitedHealth Group that you should be aware of.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.