UnitedHealth (NYSE:UNH) is coming off another bruising week, with shares down 7% – bringing the 12-month decline to a steep 50% – as a string of PR crises continues to weigh heavily on investor sentiment.
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Since the assassination of Brian Thompson, the CEO of its insurance division, in New York last year, the company has faced mounting scrutiny. Investors are increasingly uneasy about UnitedHealth’s transparency, while the public has raised sharp concerns over its claims-handling practices.
Given the reputational setbacks, investor A.J. Button believes the fallout could soon weigh on the company’s bottom line.
“Bad PR can lead to brand damage,” he warns, “which in turn can lead to policyholders taking their business elsewhere.”
That said, Button acknowledges that the company’s fundamentals remain relatively strong. UNH still boasts a robust balance sheet and solid profitability metrics, suggesting it has the financial strength to withstand pressure. “Nevertheless,” Button cautions, “the issues facing UnitedHealth right now are very real.”
One of the most pressing red flags is the company’s exceptionally high claim denial rate, reportedly the highest in the sector, according to multiple sources. While not catastrophic in itself, such a pattern could indicate flawed underwriting or strained claims infrastructure – issues that compound the reputational damage and hint at possible internal mismanagement.
“So,” Button adds, “UnitedHealth has many qualities, good and bad.” On one hand, its financial footing and history of profitability provide a cushion. On the other, cracks are beginning to show: for fiscal 2024, its combined ratio hit 97.2% – right up against the industry’s red line. Button argues that, before investors can have full confidence, the company needs to take meaningful action to shore up its underwriting performance.
Whether that turnaround is underway remains an open question. UnitedHealth recently reinstated former CEO Stephen Helmsley, following the previous leader’s departure. But the move has raised eyebrows, given that Helmsley is a longtime insider who presided over many of the company’s earlier challenges. His return doesn’t exactly scream transformation.
A rebound is still possible – especially if the company takes decisive steps to restore trust and address internal inefficiencies. However, given the scale of its current controversies, Button advises investors to weigh the risks carefully. Even the stock’s seemingly low P/E ratio doesn’t present a compelling bargain relative to peers in the life and health insurance space.
“When considering a stock like UnitedHealth, with a good track record but an unprecedented new set of risk factors, it pays to be cautious,” the investor summed up.
Can UnitedHealth Stock Bounce Back?
Button assigns a ‘low-conviction’ buy rating on UNH shares – a nod to its potential, but with more than a few strings attached. (To watch Button’s track record, click here)
Wall Street, though, is a bit more upbeat. The stock holds 19 Buy recommendations, 6 Holds, and just 1 Sell, translating to a Moderate Buy consensus rating. With an average price target of $364.96, analysts are eyeing 29% upside from current levels. (See UNH stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured investor. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.