For the Patient Investor, UnitedHealth Could Unlock Serious Value

Key Points

• News of a Justice Department probe and a decline in earnings have weighed on the stock.

• UnitedHealth has outlined a plan to tackle its recent problems.

• 10 stocks we like better than UnitedHealth Group ›

The old proverb "patience is a virtue" is very true in the world of investing. Investors who aren't scared off by a struggling stock, have the ability to see the company's long-term potential, and decide to buy and hold on for a number of years could reap the rewards.

And today, UnitedHealth Group (NYSE: UNH), a health insurance leader that's faced challenges in recent times, may offer investors this opportunity. From a federal probe to disappointing earnings, the company has delivered bad news this year -- and its stock price has seen itself cut in half just within the past several months. But it's important to focus on the complete picture, and when we do this, it's clear this healthcare stock could unlock serious value for the patient investor. Let's take a closer look at this recovery story buy.

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Image source: Getty Images.

UnitedHealth's solid moat

UnitedHealth is the No. 1 U.S. health insurer, operating both the insurance arm, UnitedHealthcare, and Optum, a unit providing services such as pharmacy. This combination of businesses offers UnitedHealth a moat, or competitive advantage -- it would be very difficult for a competitor to create a similar vast ecosystem of healthcare services. This leadership and structure are one reason to like this healthcare giant.

And, over time, the company has delivered a track record of steady growth in both revenue and net income.

UNH Revenue (Annual) data by YCharts

In recent months though, UnitedHealth has encountered some challenges. The Justice Department launched a probe into its Medicare Advantage practices, though UnitedHealth said in a filing with the Securities and Exchange Commission that its "complying" with all requests. (The company also highlighted its track record of conduct, saying that after a decade-long civil challenge concerning aspects of its Medicare business, a special master appointed by the court found no evidence of wrongdoing.)

On top of this, earnings disappointed both the company and its investors in the latest quarter. UnitedHealth said it underestimated the rising costs of healthcare and patient use of medical services in the quarter when it made initial forecasts. As a result, adjusted earnings per share in the quarter fell to $4.08 from $6.80 in the year-earlier period. UnitedHealth also said its medical care ratio, or the amount of premiums revenue spent on patient claims, is expected to top 89% this year -- this is up from an earlier forecast of about 86%.

The Affordable Care Act says health insurers must spend at least 80% to 85% of premiums on care -- but a ratio that greatly surpasses those levels hurts profitability, and this is the situation UnitedHealth is in right now.

UnitedHealth's focus on recovery

Still, UnitedHealth isn't ignoring these issues and instead aims to tackle them in various ways, from exiting certain plans that have become too costly for the insurer to increasing premiums and using artificial intelligence (AI) to streamline operations. The positive news here is UnitedHealth has the tools necessary and a strategy to address today's problems -- and, as mentioned above, the company's market position and moat offer it another long-term strength.

Now, let's consider the stock price. UnitedHealth has been a long-term winner for investors, climbing more than 400% over the past decade through early this year. But, from a high in early April of this year, the stock has dropped about 47%.

This has left UnitedHealth trading for 19times forward earnings estimates, down from more than 32 in April. The stock looks particularly cheap at today's level, considering its history of earnings gains and potential to get through this tough spot and to continue delivering steady growth.

Recovery surely won't happen overnight though. It may take a few quarters for UnitedHealth to deliver proof that it's on the right track when it comes to earnings growth -- and challenges like the Justice Department probe may linger around for a while. So, investors who consider buying UnitedHealth shares today should keep this in mind and get ready to hold on for a number of years.

But, considering UnitedHealth's valuation today and the company's focus on addressing the headwinds, that patience may be rewarded -- and this top healthcare stock could unlock serious value over the long run.

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Adria Cimino has no position in any of the stocks mentioned. The Motley Fool recommends UnitedHealth Group. The Motley Fool has a disclosure policy.