Why We Are Raising UnitedHealth's Fair Value Estimate
The firm's near-term outlook looks slightly higher than our expectations.
Narrow-moat UnitedHealth Group (UNH) gave its final outlook for 2020 and its initial outlook for 2021 at its annual investor day. The firm's near-term outlook looks slightly higher than our expectations. Considering that and cash flows generated since our last valuation update, we are raising our fair value estimate 8% to $329 per share from $304 previously.
For 2020 and 2021, the company released guidance that is slightly higher than our expectations, which contributes to our higher fair value estimate roughly equally to recently generated cash flows. Specifically on the final 2020 outlook, management now expects revenue around $257 billion and adjusted earnings per share nearing the higher end of its recently raised guidance range of $16.50-$16.75, up from 16.25-$16.55. These expectations are slightly higher than than our previous estimates ($16.56), and we've raised our 2020 expectation to $16.75, which was not material to our fair value estimate.
For 2021, the company gave an outlook that was roughly in line with our adjusted EPS outlook but higher on the revenue and cash flow lines. This higher cash flow outlook was the main operational driver of our fair value estimate. Of note, the outlook for 2021 is slightly lower than the firm's longer-term outlook (13% to 16% EPS growth) because of ongoing headwinds related to the pandemic and economic downturn ($1.80 of constraints). Our estimate for adjusted EPS remains within the company's target range for 2021 ($17.75-$18.25), which is only 6% to 9% expected growth relative to the high end of 2020's target range. However, we were impressed with the firm's operating cash flow expectation of $20 billion-$21 billion for 2021, which was higher than our previous estimate of $19 billion. We have raised our estimate for next year's cash flow in line with management's outlook, contributing to the increase in our fair value estimate. Most of our other intermediate- and long-term expectations have not changed materially.
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Julie Utterback does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.