The Business Diversification Of This Health Stock Made It A Top Pick At Morgan Stanley

Based on Morgan Stanley's analysis of UnitedHealth's plans to diversify its business within Medicare and to position itself there better, the health insurance giant can make a big leap forward.

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Erin Wright, an analyst at UnitedHealth and Cigna, recently switched their top picks in healthcare facilities and managed care from Cigna to UnitedHealth. Having a price target of $587 on UnitedHealth, Wright thinks the stock could advance 13.9% over the next year from where it ended Monday's session, which implies the stock has a chance to rise 13.9% from its current price.

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The company's leadership believes that the Cigna acquisition represents an opportunity for UnitedHealth to buy a significant chunk of the market-leading insurer, she said in a note to clients on Tuesday.

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There has been an increasing concern over the PBM Transparency Act as well as the possibility of a recession among investors, and Wright said she prefers companies with more diversified business models who can weather potential headwinds better. The analyst said that UnitedHealth is perhaps the company that is most diversified in the managed care sector, with approximately 44% of its earnings coming from health insurance and about 56% coming from its subsidiary Optum.

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It is important to note that no single segment of the 56% represents more than 16% of earnings in terms of individual health insurance, she said. There is also a strong allocation of earnings between Optum's three segments, which are health care, prescription drugs, and technology, within its 56% share of the market.

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There has been a sharp differentiation between OptumHealth specifically and its peers as far as long-term earnings growth is concerned, Wright said. In her remarks, she noted that ten years ago, UnitedHealth's profitability came from health insurance at a rate close to 90%, while Optum's contribution was 10%.

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With lower Medicare Advantage rates expected in 2024, UnitedHealth's strategic positioning within Medicare Advantage, which it has currently, will be of paramount importance heading into the new year, Wright stated. 

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In addition to UnitedHealth, which has a wide variety of higher-quality plans, along with Humana and Alignment, she said that they should be able to gain a lot of members during this period of time. In contrast, companies that are already struggling with their plans should see their outlook worsen as the economy continues to weaken.

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The amount of Medicare Advantage share that UnitedHealth currently holds is between 20% and 30%, according to Wright, due to a tie-in with OptumCare. It is expected that the company will be able to grow earnings on a long-term basis as this number rises, she said.

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During the past year, the stock has declined 2.8%, which is lower than the market as a whole.

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