Is UnitedHealth an Undervalued Stock to Buy Now?

The U.S. healthcare industry has been a lightning rod for controversy for years, but it's especially murky right now.

A political battle continues within the U.S. government over renewing expired Affordable Care Act (ACA) subsidies. The soaring cost of healthcare, even for those with private insurance, has become a focal point as people continue to struggle under the weight of rising living expenses.

That's before getting to UnitedHealth Group (NYSE: UNH). America's most prominent health insurance and services company has faced numerous problems, including the public slaying of its insurance CEO late last year, surging Medicare costs, and investigations into allegations of misconduct.

All of this has weighed on the stock price. Down nearly 50%, is UnitedHealth Group still an undervalued stock to consider buying now?

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Navigating business and political disruption

The tragic death of UnitedHealthcare's late CEO Brian Thompson and ongoing investigations into allegations of immoral business practices are bad publicity that shine an uncomfortable spotlight on the company. But those haven't directly impacted the company's bottom line at this point.

However, skyrocketing costs in UnitedHealthcare's Medicare business have.

Seniors using the company's Medicare Advantage plans have sought far more care than anticipated this year, resulting in soaring care costs that squeezed profits. UnitedHealthcare, the insurance segment of UnitedHealth Group, reported an operating margin of 2.1% in the third quarter, down from 5.6% in the same period last year.

Additionally, subsidies for the Affordable Care Act were one of the key sticking points during the recent U.S. federal government shutdown. As of now, the subsidies have not been extended and will expire at the end of the year.

If the government doesn't ultimately extend the subsidies, premiums will increase for those who use the ACA's exchanges, potentially pricing them out of purchasing insurance.

Getting the business back on track

UnitedHealth Group is acting swiftly, with a plan to raise premiums to stabilize and boost its profit margins while shedding unprofitable business. In other words, the company wants to cover fewer people more profitably.

Management anticipates that its premium increases will result in the loss of up to 1 million Medicare Advantage members next year, including an estimated 400,000 individuals who will switch to more affordable coverage offered by competitors.

UnitedHealthcare is also aggressively raising premiums for ACA exchange policies, with an average increase of 25% across the 30 states where it offers them. The company is withdrawing from states where it can't negotiate favorable pricing. In all, management expects that this will decrease enrollment by as much as two thirds.

While companies have a duty to their shareholders, those who invest in UnitedHealth Group and other healthcare stocks should probably be comfortable with the social and political scrutiny that comes with continuously rising healthcare and insurance costs.

There's significant upside potential if the company is successful

Management slightly raised the company's full-year earnings guidance from $16.00 per share to $16.25 during its third-quarter earnings report. UnitedHealth Group hopes to grow its earnings at an annualized rate of 13% to 16% over the long term. A dividend yield of 2.7% could push the stock's total returns into the high teens on an annualized basis.

The stock trades at just over 20 times management's updated guidance, a compelling price-to-earnings ratio if it hits that growth rate. That's a PEG ratio of only 1.25 to 1.50. There is also potential for valuation expansion if the market rewards UnitedHealth Group for stronger business performance, perhaps adding to the stock's upside.

Even if the company falls short of its growth goals, there is still some margin of safety. A 10% annualized earnings growth rate still values the stock at a reasonable PEG ratio of 2.0.

The government, not bad publicity or allegations of misconduct, is the biggest threat to UnitedHealth Group. Healthcare is a consistently contentious issue during elections, and while there hasn't been a comprehensive overhaul of the industry yet, investors shouldn't dismiss the possibility.

Barring something actually happening on that front, UnitedHealth Group remains a key cog in a machine that has produced astounding corporate profits for decades and is worth buying while undervalued.

Justin Pope has no position in any of the stocks mentioned. The Motley Fool recommends UnitedHealth Group. The Motley Fool has a disclosure policy.