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UnitedHealth (UNH) has experienced significant volatility, with its stock down approximately 55% from its 52-week high. Once viewed as a stable blue-chip stalwart, the company trades more like a distressed asset amid a series of negative developments. Rising medical costs, an unexpected CEO departure, and heightened regulatory uncertainty stemming from former President Trump’s recent executive order on drug pricing have all contributed to investor unease.
While the stock may appear attractively valued following its sharp decline, caution is warranted. The current environment remains highly uncertain, and further downside risks could materialize in the near term. As a result, I am bearish on UNH.
Rising Medical Costs Rattle Nerves
UNH’s most significant challenge these days is the underlying surge in medical costs that have blindsided management. As the most prominent provider of Medicare Advantage plans in the U.S., serving over 8 million seniors, UNH has faced a flurry of claims as patients seek delayed procedures like hip and knee replacements post-COVID. That was one of the biggest reasons UNH slashed its full-year outlook last month after a rare earnings miss.
In fact, that was UNH’s first earnings miss since 2008. The company cited “unanticipated changes” in its Optum unit and higher-than-expected care utilization. Since then, investors have naturally kept dumping shares as faith in UNH’s cost management faltered.
CEO Exit Sparks Leadership Crisis
As the dust was settling, UNH dropped a bombshell: CEO Andrew Witty resigned abruptly two days ago for “personal reasons,” and the company withdrew its prior full-year outlook. Stephen Hemsley, a former CEO and current chairman, stepped back into the top role, but the move feels like an unplanned stopgap.
Witty’s departure caps a rough year for the company, one that saw a massive cyberattack exposing the data of 190 million customers and the shocking murder of UnitedHealthcare CEO Brian Thompson in December. Notably, the fact that his resignation came right after UNH missed earnings for the first time since the Great Financial Crisis has raised questions about what else might be going wrong behind the scenes. At 72 years of age, analysts see Hemsley as a temporary fix. So that has, reasonably so, only added to investor anxiety over the company’s lack of a long-term plan.
The craziest part is that UNH’s leadership void couldn’t come at a worse time. UNH faces scrutiny over soaring medical costs and public outrage tied to Thompson’s killing, which sparked debates about insurer practices. Witty had driven UNH’s revenue to $400 billion, but recent stumbles eroded confidence. With Hemsley steering a ship under regulatory and operational strain, the absence of a long-term leader risks keeping UNH’s stock in the penalty box.
Trump’s Drug Pricing Order Targets PBMs
However, the most decisive blow landed on Monday this week, when President Trump signed an executive order to slash U.S. drug prices by aligning them with lower costs abroad. This wasn’t just a hit to drugmakers as it directly aimed at pharmacy benefit managers (PBMs) like UNH’s Optum Rx, accusing them of inflating costs.
Reuters reported that the order seeks to skip PBMs, potentially disrupting their role in negotiating drug prices. Clearly, the broader threat to Optum Rx’s margins looms large, especially as analysts warn of legal and regulatory hurdles that could prolong uncertainty.
A Bargain with Baggage
On paper, one could argue that UNH looks like a steal. Trading at roughly 13x this year’s consensus EPS, it’s a far cry from its historical premium, while the 55% share price plunge, which has primarily taken place in just a month, suggests the market may have overreacted.
The bottom line is that UNH isn’t a small-cap with a speculative business model but an insurance behemoth that generates revenues over $400 billion per annum. It has a fantastic track record of generating high returns on capital and returning cash to shareholders.
UnitedHealth (UNH) revenue, earnings and profit margin history
UnitedHealth (UNH) revenue, earnings and profit margin history
Still, the risks are hard to ignore. Trump’s executive order could compress PBM profits if drug prices fall without offsetting gains elsewhere. And sure, UNH’s diversified business model might cushion the blow compared to peers like Cigna (CI), but the negative sentiment is palpable.
Legal challenges to the order, as flagged by health policy experts, could drag out the uncertainty, keeping UN