Revisiting UnitedHealth's stock
After the market close yesterday, Warren Buffett's Berkshire Hathaway (BRK-B) filed its second-quarter 13F. This filing revealed all the stocks the company bought and sold during the quarter, as this Wall Street Journal article details.
I applaud Berkshire's move to reduce its stake in Apple (AAPL), as I believe the stock is no longer a growth company and its valuation is too high.
But the most interesting disclosure was a new 5-million-share position in battered health care giant UnitedHealth (UNH)...
This morning, UNH popped more than 12% on the news. This gives Berkshire's stake a value of roughly $1.5 billion.
Berkshire has a $1 trillion market cap, so its UnitedHealth position is tiny in comparison. As you can see in CNBC's Berkshire Hathaway Portfolio Tracker, it's not even in the top 20 holdings.
But I've had my eye on UnitedHealth for a while. And this move prompted me to revisit the stock and the latest financials with a closer look...
First, consider some context for the stock itself...
UnitedHealth was an absolute monster over most of the past two decades. It rose more than 30-fold from its early 2009 lows to its peak late last year at around $630.
But the stock has been crushed this year, losing around half its value:
With this context, let's look at the past two decades of revenue and net income:
UnitedHealth has been an incredible growth story...
As you can see in the chart above, revenue has gone up every year since 2006. And the only two profit declines were during the global financial crisis and last year.
The chart below breaks down the quarterly numbers for the past five years. It shows steady revenue growth as well, but more erratic profitability.
In particular, there was a steep net income decline of 19% in the most recent quarter. (We can ignore the major dip in the first quarter of 2024, which was due to a noncash charge from the sale of its Brazilian operations.)
Turning to the cash-flow statement, we can see that it mirrors the income statement...
The chart below shows strong, steady growth over the past two decades. Like its revenue and net income, the only notable hiccups in free cash flow ("FCF") were during the global financial crisis and last year:
Also note that the business isn't capital intensive. It has low capital expenditures ("capex") relative to its cash from operations.
Given the exceptional amount of FCF UnitedHealth generates, I was surprised to see that its net debt has risen steadily over the past two decades. It currently sits at $50.6 billion:
To understand why this happened, let's take a look at the company's capital allocation...
In the chart below, we can see that UnitedHealth has been a serial acquirer. It has paid $121 billion in cash for dozens of acquisitions over the past two decades:
It has also returned $56 billion to shareholders in the form of dividends (the stock currently yields 3%). Plus, it made $86 billion of share repurchases.
This has reduced its diluted share count by 34% over the same time frame:
Lastly, let's turn to valuation...
At around $307 per share with 910 million shares outstanding, the company has a market cap of $279 billion. Adding the net debt, its enterprise value is $330 billion.
Is this cheap? Well, that depends on what you think earnings will be in the future...
In 2024, the company earned $27.66 per share. That means the stock is currently trading at only 11.1 times last year's earnings – roughly half the multiple of the average S&P 500 Index company.
But analysts expect earnings to be only $16.23 per share this year, down 41%. That would be a price-to-earnings multiple of 18.9 times, which is much less cheap.
Of course, the key question is what earnings will be going forward...
There's a great deal of uncertainty. That's why estimates for 2026 are extremely varied, ranging between $16 per share and $25 per share.
The WSJ reports that UnitedHealth's second-quarter earnings were grim, mainly due to rising health care costs and operational shortfalls. Year over year, net income fell 19%. And the company reduced guidance again for the year. Here's an excerpt from the WSJ article:
Chief Executive Stephen Hemsley... sought to offer a reset after a financial meltdown that has pushed down the company's valuation by hundreds of billions of dollars this year.
Hemsley set a chastened tone in a long call with analysts Tuesday, as he and other executives highlighted a series of missteps and planned strategy changes, including pullbacks in areas that the healthcare company has long positioned as growth engines...
He said the company will return to moderate earnings growth in 2026, with strengthened performance in 2027 and after.
That said, as I concluded after my deeper dive on the company back in late June...
Overall, I think UnitedHealth's stock looks interesting...
Yes, the company has behaved badly in certain areas and will likely face fines, regulatory headwinds, and reduced profits. But I think the stock price likely reflects all of this – and, ultimately, these are fixable problems.
So, why am I not pounding the table on the stock today? Three reasons...
First, I generally eschew companies whose growth has been driven by acquisitions (Berkshire Hathaway being a notable exception).
Numerous studies show that most corporate acquisitions destroy value. Some of the biggest corporate blowups in history – think Tyco, WorldCom, and Lucent – were serial acquirers.
Second, I prefer betting on turnarounds in which there's little or no debt – think Meta Platforms (META) in late 2022.
I don't think UnitedHealth's debt is at a generous level at about $51 billion. But it does constrain the company in a number of ways... For example, it wouldn't be able to take advantage of the reduced share price by buying back a boatload of stock.
Third, I'm wary of companies in heavily regulated industries.
In this case, I think UnitedHealth has been gaming our dysfunctional health care system to inflate its profits. But now, the game is over. And the company is under heavy scrutiny.
This recent New York Times article captures how UnitedHealth has tarnished its reputation and financial prospects over the long term:
Regulators have resisted allowing the conglomerate to make major acquisitions because it is already so big. And the American public is deeply skeptical that it can deliver better, cheaper care rather than milking the system...
UnitedHealth officials acknowledge the company's scale, though they say it is still a relatively small share of the health care system. But many Americans have come to see it as emblematic of everything wrong with the system: a byzantine, bureaucratic insurance industry intent on making it harder for people to get treatment as a means to maximizing profits.
As a result, I think this WSJ Heard on the Street article is likely correct – that the company faces a long road to recovery and numerous questions about its long-term growth potential:
Fixing what has become a messy conglomerate is necessary. But with the health insurance landscape no longer as favorable as it has been in recent years, it will take time for margins to recover. For UnitedHealth specifically, antitrust scrutiny also limits its ability to rely on acquisitions as a growth lever.
In summary, I think it's still too early to take the plunge into UnitedHealth. More "shoes" could drop that would knock the stock down further.
However, at some point – and at some price – UnitedHealth will look more compelling.
My team and I at Stansberry Research will be following the stock. And if we decide things get to a point where UnitedHealth looks compelling enough to recommend, we'll let Stansberry's Investment Advisory subscribers know first – as always.
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Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.