UnitedHealth Group Inc (NYSE:UNH) stock has been on fire over the last 10 years. Up more than 16-fold from its 2008 low, it now stands as the world’s largest health company by revenue. However, valuations have risen, and the cost of healthcare has become an increasing burden on the consumer and taxpayer. With costs pushing the limits of sustainability, now may not be the time to pay a higher valuation for UNH stock.
UNH stands in a solid position in its industry. That strength has shown up in its numbers, which only seem to improve. UNH’s last earnings report showed the stock beating both revenue and earnings estimates. UNH increased earnings per share by 28.7% from the same quarter last year. The company also raised 2018 guidance to on non-generally accepted accounting principles earnings guidance to the $12.40- to $12.65 per-share range. UNH earned $10.72 per share in 2017.
ACA Changes Health Insurance Industry
Put simply, the increasing unaffordability of American healthcare drives the price of UNH stock. Healthcare spending accounts for 17.9% of the U.S. gross domestic product. On a per-capita basis, this stands as double the level seen in other developed countries. Both the passage of the Affordable Care Act (also called the ACA or “Obamacare”), as well as 10,000 Baby Boomers aging into Medicare each day, add another catalyst to healthcare costs. As a result, most entities now seek ways to minimize cost impacts. This mitigation often centers around insurance companies.
Ever since the ACA came into effect, insurers have been trying to bring in enough revenue to cover costs. Conversely, corporate entities have been wanting to own insurers to try to minimize their costs. As a result, higher revenues and profits have driven insurers higher on one end. On the other end, investors seeking to benefit from increasing profits have further driven up the price of UNH stock and that of its peers.
As a result, pharmacy retailer CVS Health Corp (NYSE:CVS) is in the process of buying Aetna Inc (NYSE:AET). In a similar vein, Express Scripts Holding Co (NASDAQ:ESRX) is working on a merger with Cigna Corporation (NYSE:CI). Walmart Inc (NYSE:WMT) is also rumored to have an interest in buying Humana Inc (NYSE:HUM). Humana currently partners with Walmart in providing a Medicare Part D plan called the Humana Walmart Rx Plan.
Watch Valuations on UNH Stock
UNH supports a market cap of over $220 billion, which makes a takeover appears less likely for UNH. However, the trends in the business have driven the price-to-earnings (PE) ratio for UNH stock and its peers much higher. In 2008, this stock traded at a PE barely in the double-digits. Today’s PE stands at almost 22, or just over 18.5 on a forward basis. The ACA, which many speculated would destroy the industry, instead served as a massive revenue and profit driver.
As long as trends remain in place, UNH stock will continue to rise. However, revenues will be hurt since the government reduced the penalty for not owning health insurance to $0. Moreover, with the cost of healthcare approaching 18% of the economy, how much more cost can the economy sustain? Perhaps it can take more, but with that cost overhang, I do not want to pay the highest PE ratio in recent history for UNH stock.
Bottom Line on UNH stock
Aging Baby Boomers and the desire to own insurers to lower healthcare costs have bolstered UnitedHealth stock. On the heels of the ACA and with an aging demographic in need of more healthcare, profits have reached record levels, and profit growth continues at a double-digit pace.
Despite its unprecedented power in the market, dangers persist. The interest in the health insurance industry has taken PE ratios to recent highs. Furthermore, with the cost of healthcare consuming a high percentage of the economy, growth in spending could be hitting limits. Profit growth should keep UNH stock in a strong position for the foreseeable future. Still, with an increasing backlash developing to the cost of healthcare in general, I would discourage buying UNH at this valuation.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.