Jefferies Sees Upside for United Health Group

Jefferies recently downgraded United Health Group’s UNH from buy to hold given the earnings outlook and high chance that the multiple stays flat at best.

United Health Group’s EPS growth of 9 percent is below its peers at 11 percent. The note states that in an optimistic scenario, the United Health Group’s EPS will top out at $6.20 which implies a 2015 growth of 11-12 percent putting it equal with its peers.

United Health Group’s valuation is at a peer-high of 15 times, which is its highest level since 2007 despite its weaker EPS growth. United Health Group’s EPS growth multiple is set at 13.8 times for 2014-2015. Jefferies’ analysts say, “The current multiple is about as high as we think the company deserves given: 1) inferior 2014 EPS growth … and 2) 2015 EPS growth that will likely be consistent with peers’ 11% at best.”

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Optum is growing, they have a projected earnings growth of 20 percent, but there is a limit to how much it can help because it represents only one-third of earnings.

Jefferies' analysts set the EPS ceiling around $6.20 assuming continued buybacks, strong Optum earnings growth, and flat YoY profitability in the United Healthcare segment in 2015.