Does UnitedHealth Group Incorporated’s (NYSE:UNH) PE Ratio Signal A Buying Opportunity?
UnitedHealth Group Incorporated (NYSE:UNH) trades with a trailing P/E of 19.5x, which is lower than the industry average of 19.7x. While this makes UNH appear like a great stock to buy, you might change your mind after I explain the assumptions behind the P/E ratio. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for. View our latest analysis for UnitedHealth Group
Demystifying the P/E ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key driver of investment value. By comparing a stock’s price per share to its earnings per share, we are able to see how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for UNH
Price-Earnings Ratio = Price per share ÷ Earnings per share
UNH Price-Earnings Ratio = $214 ÷ $10.952 = 19.5x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to UNH, such as company lifetime and products sold. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. At 19.5x, UNH’s P/E is lower than its industry peers (19.7x). This implies that investors are undervaluing each dollar of UNH’s earnings. As such, our analysis shows that UNH represents an under-priced stock.
Assumptions to be aware of
However, before you rush out to buy UNH, it is important to note that this conclusion is based on two key assumptions. The first is that our “similar companies” are actually similar to UNH, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with UNH, then its P/E would naturally be lower than its peers, as investors would value those with lower risk at a higher price. The second assumption that must hold true is that the stocks we are comparing UNH to are fairly valued by the market. If this does not hold, there is a possibility that UNH’s P/E is lower because our peer group is overvalued by the market.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
