UnitedHealth Group: The 2025 Investment Thesis

Summary:

• UnitedHealth Group is positioned as a leader in the health services industry despite setbacks from a cyberattack and industry headwinds in 2024.
• The company’s 2025 investment thesis is optimistic, with expectations of market share gains, margin improvements, and recovery for Optum Insight.
• UNH is expected to outperform in 2025, with the potential for revenue growth above estimates, leading to a price target of $640 per share.

In a year defined by headwinds for the health services industry and significant setbacks caused by a cyberattack, UnitedHealth Group Incorporated (NYSE:UNH) is showing why it’s the one and true leader in the space.

As we’re getting closer to 2025, I think the setup for UNH is becoming increasingly attractive.

Following the recent upswing, it’s time to look ahead and discuss our 2025 investment thesis.

Nothing Easy In 2024

I think it’s safe to say that 2024 has been (and still is) as far from smooth sailing as it can be.

As we’ve discussed extensively in my previous articles, five key forces are pressuring the industry: (1) Increasing utilization trends, helped by pent-up demand from COVID-19; (2) Misalignment between CMS rates and said utilization trend, pressuring medical care ratios, primarily in Medicare and Medicaid; (3) Medicaid redeterminations, as members joined under the looser COVID-19 criteria are losing eligibility; (4) Rising competitive pressure, as aggressive pricing and benefits from companies like CVS Health Corporation (CVS) and Humana Inc. (HUM) results in either membership losses or lower margins; (5) Regulatory scrutiny, specifically on PBMs.

On top of that, Optum’s Change unit suffered from a major cyberattack, which is garnering management’s focus, costing a lot of resources, and putting a halt to several of the company’s plans. In addition, UNH is going through the divestiture of its international businesses.

Despite all of the above, UNH is second only to The Cigna Group (CI) on the yearly chart, with the latter benefitting from lower exposure to Medicare and Medicaid, which are the key headwind segments for the industry.

I think it’s safe to say, it can only get better from here, right? So let’s dive into our 2025 investment thesis.

UnitedHealth Group 2025 Investment Thesis

UnitedHealth Group has been a market-beating investment for the past decade, driven by consistent double-digit growth and market share gains.

The underlying driver is the secular growth in U.S. health expenditures. UnitedHealth, with its diversified divisions across key healthcare services segments, is capturing a meaningful portion of that growth trend and shall continue to do so.

While that is the basis of my long-term investment thesis in UNH, I believe that 2025 is shaping up to be particularly positive for UNH due to lower competitive pressures, expected recovery in Optum Insight, and easing industry headwinds.

Easing Competitive Pressures Should Result In Market Share Gains & Margin Improvements

In the past couple of years, we’ve seen competitors like CVS trying to replicate UnitedHealth’s formula by acquiring care providers and care enablers, as well as trying to accelerate growth in insurance members through aggressive pricing and benefits.

On paper, this seemed like a great plan, and I too thought this would work. As it turns out, however, operating a powerhouse like UNH is extremely, extremely difficult. It requires best-in-class proficiency across every pillar of the healthcare chain, as well as decades of learning and data.

Perhaps the clearest demonstration of the difference in management expertise is that UNH maintained its initial guidance for the year (and effectively raised it). Meanwhile, many of its peers had to decrease their guidance multiple times as they continued to encounter “unexpected” pressures from utilization and rates. That is, despite all the company-specific problems, which primarily include the cyberattack.

As a result of their struggles, competitors are forced to change their strategy. Here are a few quotes from recent conferences:

Karen Lynch, CVS President and CEO, at Bernstein’s recent conference:

Our sole goal is margin recovery. So one of a couple of things that we’ve done is we have reduced benefits. We said we were going to exit counties. We are going to, in some counties, pull products and refile. And then, we took a view that the elevated trends will continue in 2025. So we’ve taken the entire kind of organization to look around the operations, and then we took an intense review of our pricing.

James Rechtin, Humana President and CEO, Q2 Earnings Call:

If there’s a place that we’re going to have to be more disciplined over the coming years, it’s really in how we’re measuring and evaluating the return on the expenses, whether it’s capital or whether it’s operating expense that we have in any given year. So that we’re optimizing those decisions and then making sure that we’ve got the processes, that we’re not just operating with discipline in one year period of time, but we’re driving the accountability over years two, three, four and five that go back to that investment you made in year one.

I think this paints a clear picture. Both companies were too aggressive in their assumptions, either when assuming utilization trends, care costs, or CMS rate increases, and that might have resulted in membership gains, but those are unprofitable membership gains.

The crucial thing to understand here is that UNH continued to gain members while protecting margins, and in 2025, while its peers are going to have to cut benefits and raise prices, UNH will be able to gain even more market share.

In the words of John Rex, UNH’s CFO:

You can expect us to continue to prioritize balanced and durable performance over transitory market share gains.

Recovery Year For Optum Insight

Optum Insight is the group’s enablement arm. It has a diversified portfolio of businesses in payments, analytics, and other IT services to healthcare institutions and professionals. One of those businesses is Change, which suffered from the cyberattack.

UNH has a payer-agnostic strategy, meaning each of its divisions and their separate subdivisions are operating independently with no preference for each other. Still, there’s significant integration and synergies between them, and when a big part of the system, in Change, suffers, they all do.

Accordingly, 2024 is shaping up to be a low point for Optum in terms of revenue growth, margins, and backlog buildup. In the funny game of comps, one bad year is the next year’s tailwind.

More fundamentally, I expect that the new and improved Optum, following the attack, will have a meaningful runway for growth, especially in 2025, with the industry becoming increasingly digital and UNH’s top leadership giving a lot of their focus to the division.

Normalized Utilization Rates & Improved Medical Care Ratios

Fingers crossed, but it seems like 2025 is set to be the first truly normal year for the industry since 2019. In 2020-2022, we had Covid. Then, in 2023-2024, the industry is dealing with post-Covid repercussions, which we’ve talked about extensively already.

With competitive pressures easing and pent-up utilization from Covid finally normalizing, I expect a much more normalized year in terms of MCRs.

I’m not expecting MCR to drop back to 2019 levels so quickly, but I think a gradual improvement from recent highs is a reasonable outlook. For context, a 1% improvement equals over $3 billion in gross profit.

Valuation

UnitedHealth has a very steady and predictable trading range. When things are bad, it can get to as low as 16-18 times forward earnings. When things are good, it can get to as high as 22. So, a fair multiple, in my view, is 20x.

Currently, UNH is trading at 20.4 times forward earnings and 18.2 times 2025 earnings. Applying a fair multiple on 2025 estimates already gets us to nearly 10% upside by early 2025.

On top of that, I see significant room to beat 2025 estimates. Based on what we discussed, I expect UNH to achieve revenue growth above the current 7.5% estimate, as well as drive margin expansion. The last time UNH didn’t beat estimates was in 2008, and I don’t see that record stopping next year.

I see them earning $32.00 per share, which brings me to a price target of $640 by early 2025. I also think that the multiple could go even higher, considering the favorable outlook in the near-to-mid-term.

Conclusion

When the industry is good, everybody can win. When things get tougher, that’s when top-quality companies like UnitedHealth Group come to shine.

As we’re getting closer to wrapping up 2024, a year full of headwinds, I encourage investors to start looking ahead.

I expect 2025 to be an extraordinary year for UNH, with market share gains, growth acceleration, and margin expansion.

Therefore, I reiterate a ‘Buy’ rating, with a price target of $640 a share.

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Analyst’s Disclosure: I/we have a beneficial long position in the shares of UNH either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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