UnitedHealth Stock Might Deserve A Premium After Current M&A Cycle

• Shares of UnitedHealth Group, Inc. UNH have risen almost 13 percent, year to date.
• Andrew Schenker of Morgan Stanley has reinitiated coverage of UnitedHealth Group with an Overweight rating and price target of $140,
• The upgrade follows the acquisition of Catamaran Corp. (USA) CTRX. Schenker believes that there is 20 percent upside to the stock.

Despite the rise in the share price, UnitedHealth is currently trading at a 5 percent discount to its peers. “We expect UNH's premium multiple can return as the MCO group moves past the current M&A cycle and investor focus shifts back to the core business,” Schenker stated.

“This return to fundamentals, coupled with accelerating earnings growth, should drive the stock higher and close its valuation gap to peers,” the Morgan Stanley report said.

Following two successive years of mere 4 percent EPS growth, UnitedHealth’s earnings are likely to have reached an inflection point in 2015. Schenker expects the company to be able to accelerate EPS growth to about 15 percent in 2016 and 2017.

This acceleration is expected to be driven by the addition of PBM revenues due to the acquisition of Catamaran, improvements in the health benefits business and increasing opportunity for the Optum business in the retail space.

“While UNH will no longer be the largest player in any insurance segment due to pending MCO deals, its large diversified offering still positions it well to take advantage of the evolving retail market,” Schenker added.