At these prices and valuations, I suggest that investors stay away from the stock and maybe even consider shorting it or a pairs trade on the premise that its valuation will converge to competitors’ as market participants realize that the company realizes what they are pricing the stock at. Taking a closer look at the valuation metrics should help understand where I am coming from.
UnitedHealth's trailing five-year valuation metrics suggest that the stock is overvalued as all three of the metrics are above their respective five-year averages. UnitedHealth's current P/B ratio is 2.1 and it has averaged 2.0 over the past five years with a high of 3.8 and low of 1.2. UnitedHealth's current P/S ratio is 0.6 and it has averaged 0.5 over the past five years with a high of 1 and low of 0.3. UnitedHealth's current P/E ratio is 11.3 and it has averaged 10.9 over the past five years with a high of 17.7 and low of 7.6.
The consensus price target for the analysts who follow UnitedHealth is $62. That is upside of 15% from today's stock price of $53.32 and suggests that the stock is fairly valued at these levels. This also suggests that the stock has limited upside and should be avoided at its current stock price.
Here is a breakdown of the forward valuation: UnitedHealth is currently trading at about $53 a share with analysts expecting EPS of $5.43 next year, an earnings increase of 13% year over year, for a forward P/E ratio of 9.8. Taking a look at the company's publicly traded comparisons will give us a better idea of the stock's relative valuation. WellPoint (WLP) is currently trading at about $64 a share with analysts expecting EPS of $8.51 next year, an earnings increase of 10% year over year, for a forward P/E ratio of 7.5. Humana (HUM) is currently trading at about $86 a share with analysts expecting EPS of $8.85 next year, an earnings increase of 11% year over year, for a forward P/E ratio of 9.7. Aetna (AET) is currently trading at about $46 a share with analysts expecting EPS of $5.63 next year, an earnings increase of 10% year over year, for a forward P/E ratio of 8.1. The mean forward P/E of UnitedHealth's competitors is 8.4 which suggests that UnitedHealth is overvalued relative to its publicly traded competitors.
According to the DCF model provided by Dividend Kings, UnitedHealth is worth $45 a share versus its current stock price of $53.32 a share. This suggests that the stock is overvalued.
About the author:I'm mostly interested in income investing using dividends, preferred stocks and other debt instruments, and pair trading.
I fundamentally analyze every business from the top down.
In my personal life, I have a strong Jewish faith and enjoy playing Scrabble and entrepreneurship.