Morningstar

Why We Are Raising UnitedHealth's Fair Value Estimate

The firm's near-term outlook looks slightly higher than our expectations.

Securities In This Article
UnitedHealth Group Inc
(UNH)

Narrow-moat UnitedHealth Group UNH gave its final outlook for 2020 and its initial outlook for 2021 at its annual investor day. The firm's near-term outlook looks slightly higher than our expectations. Considering that and cash flows generated since our last valuation update, we are raising our fair value estimate 8% to $329 per share from $304 previously.

For 2020 and 2021, the company released guidance that is slightly higher than our expectations, which contributes to our higher fair value estimate roughly equally to recently generated cash flows. Specifically on the final 2020 outlook, management now expects revenue around $257 billion and adjusted earnings per share nearing the higher end of its recently raised guidance range of $16.50-$16.75, up from 16.25-$16.55. These expectations are slightly higher than than our previous estimates ($16.56), and we've raised our 2020 expectation to $16.75, which was not material to our fair value estimate.

For 2021, the company gave an outlook that was roughly in line with our adjusted EPS outlook but higher on the revenue and cash flow lines. This higher cash flow outlook was the main operational driver of our fair value estimate. Of note, the outlook for 2021 is slightly lower than the firm's longer-term outlook (13% to 16% EPS growth) because of ongoing headwinds related to the pandemic and economic downturn ($1.80 of constraints). Our estimate for adjusted EPS remains within the company's target range for 2021 ($17.75-$18.25), which is only 6% to 9% expected growth relative to the high end of 2020's target range. However, we were impressed with the firm's operating cash flow expectation of $20 billion-$21 billion for 2021, which was higher than our previous estimate of $19 billion. We have raised our estimate for next year's cash flow in line with management's outlook, contributing to the increase in our fair value estimate. Most of our other intermediate- and long-term expectations have not changed materially.

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About the Author

Julie Utterback, CFA

Senior Equity Analyst
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Julie Utterback, CFA, is a senior equity analyst, AM Healthcare, for Morningstar*. She focuses on medical technology and service companies. She covers managed care organizations including UnitedHealth, service providers like HCA, medical suppliers such as Baxter, and life sciences companies like Danaher. She is also the chairperson of the equity research team’s capital allocation methodology.

Before joining Morningstar in 2005, Utterback was an equity analyst at State Farm Insurance for several years. Utterback joined Morningstar in 2005 as an equity analyst in the healthcare industry, and initially she primarily covered medical technology companies, including orthopedic device, medical equipment, and cardiac device firms. In 2010, she joined Morningstar's credit research team, initiating coverage of the entire healthcare industry and generally helping the organization expand and maintain its credit coverage across many industries. She held that senior credit analyst role until April 2019, when she returned to the equity team to cover medical technology and service companies.

Utterback holds a bachelor's degree in finance from the University of Illinois Urbana-Champaign’s Gies College of Business. She also holds the Chartered Financial Analyst® designation.

* Morningstar Research Services LLC (“Morningstar”) is a wholly owned subsidiary of Morningstar, Inc

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