Deutsche Bank says take chance on beaten-up UnitedHealth because of valuation

Deutsche Bank maintained a buy rating on UnitedHealth (UNH) with a $362 price target, suggesting a 21.4% upside from Thursday's close, based on a historically low earnings multiple. Despite a 41% decline this year due to CEO exit, DOJ investigation reports, and rising medical costs, the analyst sees UNH as a defensive large-cap healthcare stock; however, regulatory concerns and negative sentiment in the managed care sector persist, and the company's growth through acquisition may be limited.

Analysis

Deutsche Bank analyst George Hill has reiterated a buy rating on UnitedHealth (UNH) shares, maintaining a $362 price target, which implies a potential 21.4% upside from Thursday's closing price. This positive stance is primarily predicated on valuation, with the analyst highlighting UNH's current earnings multiple of 16x as being at the low end of its 10-year trading range, even when applied to anticipated 2025 trough earnings. Despite this valuation-driven optimism, UNH shares have declined 41% this year due to a confluence of factors, including its CEO's recent departure, the suspension of its annual forecast, reports of a Department of Justice investigation into fraud allegations, and increased medical costs. Hill acknowledges these persistent challenges, regulatory overhang, and negative sentiment within the managed care organization (MCO) space, stating his target multiple accounts for these issues. While viewing UNH as a defensive large-cap healthcare services entity, he suggests the company should abandon its current long-term guidance, which he deems higher than that of most peers. The core managed care business is projected to deliver operating profit growth between 3% and 5% as Medicare Advantage plans mature, but the analyst notes that growth through acquisitions will be "challenged at best."

Key Decisions for Investors

• Investors might consider the current historically low valuation as a potential entry point, aligning with the analyst's buy recommendation, but must weigh this against significant ongoing risks including the DOJ investigation and higher medical costs.
• Closely monitor for any revisions to UnitedHealth's long-term guidance, as suggested by the analyst, and further developments on regulatory matters and medical cost trends, as these will be critical in reassessing the stock's risk-reward profile.
• Temper expectations for rapid expansion, as core business operating profit growth is forecast in the modest 3-5% range and opportunities for M&A-driven growth are perceived as limited.