UnitedHealth Group Incorporated (UNH) Valuation Report

Intrinsic Value
$453B

Value Per Share
$484 -1%

Price Target
$546 12%

Market Cap
$451B

Enterprise Value
$484B

Price
$487.75 -5.26%

Dividend Yield
1.5%

Adjusted Yield
3.1%

TTM Growth Margin Ratio Yield
Revenue $370B 14.8% 1.3x
Gross -$563B -825.4% -152.2% -0.9x
EBITDA $34B 15.5% 9.3% 14.1x
EBIT $32B 13.8% 8.8% 15.0x 6.7%
Profit $23B 11.1% 6.2% 19.7x 5.1%
FCFF $18B 452.4% 4.8% 27.5x 3.6%
FCFE $20B 46.1% 7.1% 22.6x 4.4%
Cost of Equity = 7.7% | Cost of Capital = 7.4%Currency: USD | Updated:
Sector: Healthcare | Industry: Healthcare Plans | Read more...

UnitedHealth Group Incorporated operates as a diversified health care company in the United States.
It operates through four segments: UnitedHealthcare, Optum Health, Optum Insight, and Optum Rx.
The UnitedHealthcare segment offers consumer-oriented health benefit plans and services for national employers, public sector employers, mid-sized employers, small businesses, and individuals; health care coverage and well-being services to individuals age 50 and older addressing their needs for preventive and acute health care services, as well as services dealing with chronic disease and other specialized issues for older individuals; Medicaid plans, children's health insurance and health care programs; health and dental benefits; and hospital and clinical services.
The OptumHealth segment provides access to networks of care provider specialists, health management services, care delivery, consumer engagement, and financial services.
This segment serves individuals directly through care delivery systems, employers, payers, and government entities.
The OptumInsight segment offers software and information products, advisory consulting arrangements, and managed services outsourcing contracts to hospital systems, physicians, health plans, governments, life sciences companies, and other organizations.
The OptumRx segment provides pharmacy care services and programs, including retail network contracting, home delivery, specialty and compounding pharmacy, and purchasing and clinical capabilities, as well as develops programs in the areas of step therapy, formulary management, drug adherence, and disease/drug therapy management.
UnitedHealth Group Incorporated was incorporated in 1977 and is based in Minnetonka, Minnesota..

Full-time employees: 400,000 | HQ: Minnetonka
Website: https://www.unitedhealthgroup.com

Valuation

Input

Revenue Growth

EBIT Margins

Reinvstment Efficiency

Cost of Capital

Tax

UNH Valuation Output

Terminal value

$588B

+ PV Terminal Value

$288B

+ PV FCFF

$198B

= Sum of PV

$486B

+ Cash

$30B

- Debt

$63B

= Intrinsic Value

$453B

Value Per Share

$484

Overvalued by 1% vs its $488 Price

1-Year Price Target

$546 (12%)

10-Year Fundamental Projections for UnitedHealth Group Incorporated (UNH)
YearGrowthSalesEBIT %EBITTaxNOPATReinvestmentROICFCFFWACCPV FCFF
TTM 3.6% $370B 8.8% $32B 21% $26B $7.9B 69% $18B 7.4% --
2025 3.6% $383B 8.8% $34B 21% $27B $1.3B 69% $25B 7.4% $24B
2026 3.6% $397B 8.8% $35B 21% $28B $1.4B 69% $26B 7.4% $23B
2027 3.6% $411B 8.8% $36B 21% $29B $1.4B 69% $27B 7.4% $22B
2028 3.6% $426B 8.8% $37B 21% $30B $1.5B 69% $28B 7.4% $21B
2029 3.6% $441B 8.8% $39B 21% $31B $1.5B 69% $29B 7.4% $20B
2030 3.7% $458B 8.8% $40B 22% $32B $2.1B 68% $29B 7.4% $19B
2031 3.9% $475B 8.8% $42B 22% $32B $2.2B 66% $30B 7.4% $18B
2032 4.0% $494B 8.8% $44B 23% $34B $2.4B 65% $31B 7.4% $18B
2033 4.1% $515B 8.8% $45B 24% $35B $2.6B 64% $32B 7.4% $17B
2034 4.3% $537B 8.8% $47B 24% $36B $2.8B 63% $33B 7.4% $16B
♾️ 4.3% $560B 8.8% $49B 25% $37B $19B 8.5% $18B 7.4% --
How is UNH's expected return calculated?

The expected return is a percent (%) estimate of how much a stock's value will change per year. It is used to calculate UNH's 1-year price target by multiplying the stock's present value with (1 + expected return). The expected return is calculated using a stock's risk (cost of capital), excess returns, and dividend yield.

Expected Return = (1 + Cost of Capital) * (Cost of Capital * (1 + ROIC - Cost of Capital - Dividend Yield))
12.8% = 107.4% * (7.4% * 161.7%)

We exclude dividend payments because they aren't reflected in a stock's price. Note that excess returns are highly dependant on our estimate of invested capital and its return. Neglecting to capitalize expense items such as operating leases, R&D, brand name marketing expenses, may inflate the excess return estimate.

Growth

In the 12 months ending Q4'23 UnitedHealth Group Incorporated (UNH) grew revenues by 14.8%, from $322B to $370B - indicating an acceleration of revenue growth. UNH has a 5-year and 3-year revenue compound annual growth rate (CAGR) of 9.0% and 9.0% respectively.

Revenue Growth Estimates

Sustainable
15.6%
Fundamental
42.1%
Priced-in
4.8%

Bottom Line Growth Estimates

Fundamental Earnings Growth
0.0%
Fundamental EBIT Growth
31.2%
Priced-in FCFF Growth
3.6%

Looking at forward estimates, we can see that the market is pricing-in a 4.8% long-term revenue growth rate, while the financials indicate a future revenue growth rate between 15.6% and 42.1%.

Using the average of these 3 estimates we get a 20.8% long-term revenue growth for UNH.

What is UNH's sustainable revenue growth?

Similar to fixed vs variable costs, the sustainable growth rate shows how much we can expect the company to grow based on their reinvestment into the business, excluding variable demand and pricing. This rate may be helpful as a long-term baseline for the company.

(UNH) has invested $37B in total capital, consisting of $4.5B in book value of equity, plus $63B in total debt, less $30B in cash & equivalents.
By adding on the average reinvestment of $12B in the last 4 quarters on a TTM basis to the $37B capital base, and applying the current sales to capital ratio of 988.3%, we can expect the company to grow its revenue to $485B, implying growth of 31.2%. However, we assume at least one gap year for CapEx to transform into growth, so we divide the rate by 2 and get a 15.6% sustainable revenue growth.
Use your own judgement based on the type of business since it takes time for reinvestment to yield growth.

What are UNH's fundamental revenue & EBIT growth rates?

The fundamental growth rates analyze how much (UNH) is reinvesting into the business, adjusted for the quality of those reinvestments to come up with an estimate for a long-term future growth. Both fundamental and sustainable gorwt rate estimates attempt to use fundamentals in estimating growth.

UnitedHealth Group Incorporated (UNH) has reinvested an average of $12B on a rolling TTM basis, reflecting a reinvestment rate of 44.2%, calculated as:
Reinvestment / (EBIT - Tax) a.k.a. NOPAT.
By multiplying the reinvestment rate with the return on invested capital (ROIC) we get a long-term estimate for a growth in EBIT:
44.2% * 70.5% = 31.2% (Reinvestment rate * ROIC)

In order to convert this to a fundamental revenue growth rate, we analyze the relationship between EBIT growth and Revenue growth, and come up with a scaling factor of 134.9%. We then multiply the fundamental EBIT growth estimate by the revenue scaling factor and get an equivalent for a fundamental revenue growth rate of 42.1%.

What FCFF & revenue growth rates is the market pricing-in for UNH?

In order to justify the current $451B market capitalization given a 7.4% cost of capital, UNH needs to keep growing its un-levered free cash flows by 3.6% across many ( >10 ) years.

UNH's market implied FCFF growth rate of 3.6% =
1 + (Enterprise Value * Cost of Capital - FCFF) / (Enterprise Value + FCFF) =
1 + ($484B * 7.4% - $18B) / ($484B + $18B)

By analyzing the relationship between EBIT growth and revenue growth, we get a scaling factor of 134.9% that we apply to our implied FCFF growth in order to get the market implied revenue growth rate of 4.8%

Margins

Gross
-152.2%
-732.0% YoY
EBIT
8.8%
-0.8% YoY
Profit
6.2%
-3.2% YoY
FCFF
4.8%
381.3% YoY
Why is UNH scaling revenues by -266.5% relative to COGS?

UNH grew revenue by 14.8% in the last 12 months, and their COGS changed by 281.3% in the same period. This means that the company is scaling revenues -266.5% worse than costs.

A company that has a scaling rate above 1:1 indicates efficient growth that may translate into added value in the bottom line. Conversely, if the rate is lower, e.g. 1:0.9, it shows that while the company managed to grow, their costs increased more than revenues.

Free Cash Flows

Reinvestment
-$7.9B
FCFF
$18B
FCFE
$20B
Net CapEx
-$9.6B
Simple FCFF
$26B
Change in WC
$1.6B

Note: cash flows in the table and chart are presented as inflows and outflows, meaning that positive numbers indicate how much a company has taken in, and negatives show how much cash has flown out.

What is included in UNH's $14B capital expenditures?

In the last 12 months UNH invested $3.4B in plant property & equipment (PPE) CapEx. By adding the $10B in acquisition expenses, we get a total CapEx of $14B.

How much is UNH reinvesting into the business?

In the last 12 months ending Q4'23, UNH made capital expenditures of $14B. By netting out the depreciation of $4B, we get a NetCapEx of $9.6B, indicating that the company invested in future growth.

Finally, we add on the change in Working Capital of -$1.6B, and get a Total Reinvestment of $7.9B.

By investing more than it depreciates, UNH is increasing its future growth assets.

How are UNH's $18B free cash flows to the firm (FCFF) calculated? UNH's $17,632,000,000.00 Free Cash Flows to the Firm (FCFF) =
$32,358,000,000.00 EBIT
- $6,029,500,000.00 Tax
- $3,386,000,000.00 Plant Property Equipment
- $10,136,000,000.00 Acquisitions
+ $3,972,000,000.00 Depreciation
+ $1,643,000,000.00 Change in Working Capital
- $851,000,000.00 Stock Based Compensation

Free Cash Flows to the Firm are important because they indicate how much a company has left over for all (debt & equity) investors.
It is a measure of the true bottom line for investors, as opposed to earnings and the simplified version of free cash flows (Cash from operating activities - PPE).

In the last 12 months UNH had $18B in free cash flows, indicating that the business has managed to create value for investors.

How are UNH's $20B free cash flows to equity investors (FCFE) calculated? UNH's $19,931,000,000.00 Free Cash Flows to the Equity (FCFE) =
$22,924,000,000.00 Net Income
- $3,386,000,000.00 Plant Property Equipment
- $10,136,000,000.00 Acquisitions
+ $3,972,000,000.00 Depreciation
+ $1,643,000,000.00 Change in Working Capital
+ $62,537,000,000.00 Total Debt today
- $57,623,000,000.00 Total Debt one year ago

Free Cash Flows to the Equity investors show how much the company has left over for shareholders.
It is an insightful metric when paired with FCFF for analyzing companies that have a lot of debt, as it can reveal the effect of interest rates on the value of equity.

When compared to FCFF, they should be roughly in-line, else we need to think about what causes the difference. In the last 12 months UNH had $20B in free cash flows to equity, indicating that the business can return capital in the form of dividends and buybacks.

Returns

ROE
0.0%
ROIC
70.5%
Sales to Cap
988.3%
How much excess returns (value) is UNH creating on average (28%), and how to calculate it?

ROE Excess Returns -7.7% = Return on Equity - Cost of Equity
ROC Excess Returns 63.2% = Return on Capital - Cost of Capital

Average Excess Returns = (ROE - Cost of Equity + ROIC - Cost of Capital) / 2

For every 1% of growth in its net and operating income, the value of UNH's stock changes by an average of 0.28%.

Excess returns are important because they help us estimate a company's target price.

If you are analyzing a company with a lot of R&D expenses, consider capitalizing them as an asset to get a better ROE & ROC estimate - You can use our automated spreadsheet.

Capital Structure

Equity
$4.5B
Debt
$63B
Cash
$30B
Interest Coverage
10.0x
Debt to EBITDA
1.82x
Debt to Capital
12.2%

Dividends & Buybacks

Adj. Yield
3.1%
Dividends + Buybacks - SBC
FCFE Payout
69.8%
% FCFE paid as Div + Net Buybacks
R-R Upside
-9.3%
FCFE yld. / Cost of Equity - 1

UnitedHealth Group Incorporated has transferred a total value of $14B to investors in the last 12 months. The required cash return (excluding expected growth) for UNH is $15B, or a 3.4% yield in the same period.

With an adjusted payout of 69.8%, UNH seems to be spending an affordable portion of its FCFE.

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