United Health Group (UNH – Free Report) was recently named to Zacks.com’s list of Most Searched Stocks. Therefore, you should consider some of the key factors that could influence the stock’s performance in the near future.
Shares of this largest US health insurer returned -8.3% over the past month versus a +6.4% change in the Zacks S&P 500 Composite. The Zacks Medical – HMOs industry, to which UnitedHealth belongs, is down 8.3% over the period. The key question now is: Where could the stock head in the short term?
Although media reports or rumors of a significant change in a company’s business prospects usually cause the stock to trend and result in an immediate price change, there are always certain fundamental factors that ultimately drive the buy-and-hold decision.
Revisions to earnings estimates
Here at Zacks, we prioritize evaluating the change in forecasting a company’s future earnings over anything else. That’s because we believe the present value of its future earnings streams determines the fair value of its stock.
Essentially, our analysis is based on how sell-side analysts who cover the stock revise their earnings estimates to reflect the latest business trends. As earnings estimates for a company increase, so does the fair value of its stock. And when a stock’s fair value is higher than its current market price, investors tend to buy the stock, causing its price to move higher. For this reason, empirical studies indicate a strong correlation between trends in earnings estimate revisions and short-term stock price movements.
UnitedHealth is expected to report earnings of $6.22 per share for the current quarter, a +13.3% year-over-year change. In the last 30 days, the Zacks consensus estimate has changed by +2.5%.
Consensus earnings estimate of $24.91 for the current year indicates a change of +12.3% year-on-year. This estimate has changed by +0.2% in the last 30 days.
For the next fiscal year, the consensus earnings estimate of $28.17 indicates a change of +13.1% from what UnitedHealth was supposed to report a year ago. In the last month, the estimate has changed by +0.1%.
Our proprietary stock ranking tool, the Zacks Rank, has a strong, third-party audited track record and provides a more meaningful picture of a stock’s near-term price action by effectively harnessing the power of earnings estimate revisions. Based on the size of the recent consensus estimate change and three other factors related to earnings estimates, UnitedHealth is rated Zack’s #3 rank (Hold).
The chart below shows the development of the company’s 12-month consensus EPS estimate:
12 Month EPS
Sales Growth Forecast
While a company’s earnings growth is arguably the best indicator of its financial health, not much happens if it can’t grow its revenue. It’s almost impossible for a company to grow its profits without increasing its revenue over long periods of time. Therefore, knowing a company’s potential revenue growth is crucial.
For UnitedHealth, the consensus revenue estimate for the current quarter of $89.17 billion indicates a +11.3% year-over-year change. For the current and next fiscal year, estimates of USD 359.17 billion and USD 383.77 billion indicate changes of +10.8% and +6.9%, respectively.
Latest reported results and surprise history
UnitedHealth reported revenue of $82.79 billion for the most recent quarter, a +12.3% year-over-year change. EPS of $5.34 for the same period compared to $4.48 a year ago.
Compared to the Zacks Consensus estimate of $82.79 billion, reported earnings represent a surprise of 0%. EPS surprise was +3.29%.
The company beat consensus estimates for earnings per share in each of the last four quarters. The company topped consensus estimates for sales three times during that period.
valuation
No investment decision can be efficient without considering a stock’s valuation. Whether a stock’s current price accurately reflects the intrinsic value of the underlying business and the company’s growth prospects is a key factor in future stock price performance.
Comparing the current values of a company’s valuation multiples, such as price-to-earnings (P/E), price-to-sales (P/S), and price-to-cash flow (P/CF), with its own historical values will help determine if the stock is fair valued, overvalued or undervalued. Comparing the company versus its peers using these parameters gives a good sense of the reasonableness of the stock price.
As part of the Zacks Style Scores system, the Zacks Value Style Score (which assesses both traditional and unconventional valuation metrics) organizes stocks into five groups from A to F (A is better than B; B is better than C; and so on), making it helpful in determining whether a stock is overvalued, correctly valued, or temporarily undervalued.
UnitedHealth is rated B on this front, indicating it is trading at a discount to its peers. Click here to view the values of some of the assessment metrics that led to this grade.
Conclusion
The facts discussed here, and plenty of other information on Zacks.com, could help determine whether or not the market clamor surrounding UnitedHealth is worth paying attention to. However, its No. 3 Zacks rank suggests that it could move in line with the broader market in the near future.
