After Boosting Its Guidance and Beating Expectations in Q3, Is UnitedHealth Stock Due for a Rally?

UnitedHealth Group (NYSE: UNH) used to be a safe stock to hang on to. Its financials looked impressive, the business got bigger, it boosted its dividend, and it looked like a no-brainer stock to hold on to. It's rare to see a blue chip stock like this go on a massive tailspin. But that's exactly what has been happening to UnitedHealth over the past year.

In just 12 months, the top healthcare stock has lost close to 40% of its value. Not only have its costs been rising but it has been facing plenty of controversy around its billing practices (there are multiple ongoing investigations involving the Department of Justice) and it has also made a change in CEO.

Last month, however, it gave investors some much-needed positive news: It beat expectations and boosted its guidance for the year. Could the highly coveted beat-and-raise combo be what's needed to send this stock on a prolonged rally?

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Earnings beat expectations, but costs remain high

Last week, UnitedHealth posted its latest earnings numbers, for the period ending Sept. 30. The company's revenue totaled $113.2 billion, which was an increase of 12% year over year. Earnings from operations totaled $4.3 billion and were half of what they were in the prior-year period.

However, its adjusted earnings per share of $2.92 beat analyst expectations by $0.13 and the company's medical care ratio of 89.9% was in line with what Wall Street was expecting. Although that's still far higher than what's normal for the industry -- a ratio of around 80% -- it could be a sign that things are at least stabilizing for the healthcare company.

Another piece of good news for investors was that the company was increasing its guidance for the year. It's now projecting its adjusted earnings per share to be at least $16.25, which is higher than its previous forecast of just $16. The company has been working on improving efficiency and cutting costs, and it plans to exit over 100 Medicare Advantage markets in order to help do that.

UnitedHealth's stock remains low, but is it cheap?

Although UnitedHealth stock has been rallying in recent months, it's still down nearly 50% from its 52-week high of $630.73. This year, the sell-off was bad enough for the stock to reach multiyear lows. While it has been rising in value, it trades at a forward price-to-earnings (P/E) multiple of 20, which is based on analyst expectations. By comparison, the average stock on the S&P 500 trades at a forward P/E of 22.

There's a slight discount for investors, but whether it's enticing enough to lure in value-oriented investors and convince them that it's still a bargain buy is the big question.

Does UnitedHealth Group stock belong in your portfolio?

It's been a tough year for UnitedHealth Group, but if you're a long-term investor, you can be comforted by the fact that it's facing what should be short-term headwinds. That's likely why another long-term investor, Warren Buffett, has become bullish on it. Earlier this year, Buffett's company, Berkshire Hathaway, disclosed a stake in the health insurer's business, which helped shine a spotlight on the stock, giving it a boost in the process.

While I don't believe this recent earnings report will be enough to spark a rally for UnitedHealth as its medical care ratio remains high, I do think the stock should still end up recovering over the long haul. But I wouldn't rule out the possibility of more adversity in the near future as the investigations into its billing practices could weigh on its valuation.

Overall, if you're a buy-and-hold investor who is willing to hang on for several years, I still think this can make for a good stock to own as UnitedHealth's modest valuation gives investors a solid margin of safety.

David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool recommends UnitedHealth Group. The Motley Fool has a disclosure policy.