This Stock Stumbled Last Year. Now It's the First Half's Best Performing Mega-Cap Healthcare Stock. Is It Too Late to Buy?

Last year, UnitedHealth Group (NYSE: UNH) faced a series of headwinds that weighed on the stock, dragging it down 34%. The biggest U.S. health insurer saw earnings suffer as it underestimated the cost and use of services, and the company unexpectedly lost its chief executive officer. Investors also grew more cautious as the Justice Department launched a probe into the insurer's Medicare Advantage operations.

But, UnitedHealth launched a series of steps to turn things around, and the plan is bearing fruit. Longtime CEO Stephen Hemsley returned to the leadership role, the company completed an independent audit of its practices and put into place new actions where needed, and earnings are improving. As a result, investors have returned to the stock. It climbed 25% in the first half, for the biggest gain by a mega-cap healthcare stock in the S&P 500.

Is it now too late to buy UnitedHealth stock? Let's find out.

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UnitedHealth's biggest challenge

First, let's take a look back at the path of UnitedHealth over the past year. As mentioned, the company faced several challenges. And the biggest may have been the earnings situation. UnitedHealth underestimated the utilization levels of healthcare amid an environment of rising costs, and these factors hurt growth.

Since, the company has taken action by exiting certain plans, increasing pricing where necessary, and using artificial intelligence (AI) tools to boost efficiency. The insurer is also reinforcing its position in rural areas and cutting prior authorization requirements -- It just recently said it would decrease these requirements by 30% this year. This is an important move as it streamlines operations for UnitedHealth and hospitals and medical offices. Meanwhile, UnitedHealth's use of technology makes prior authorizations easier to manage, with 95% performed electronically and 90% approved within one business day.

In the recent quarter, UnitedHealth's total revenue increased 2% to $111 billion, while adjusted earnings per share at $7.23 surpassed the company's expectations. Importantly, the medical care ratio -- a measure of the insurer's costs in relation to its revenue from plans -- improved. A lower ratio suggests higher profitability. In the quarter, UnitedHealth's ratio came in at 83.9%, down from 84.8% a year earlier. The company said this was due to improved cost management.

Margin pressure may continue

All of these efforts are ongoing, so we should expect to see additional improvements in the quarters to come. That said, the company said margin pressure will remain this year due to high utilization trends, though this should improve in 2027. UnitedHealth and other insurers also will benefit from higher-than-expected Medicare Advantage rates next year. The government approved a 2.48% average rate increase for 2027, up from the initial proposal of 0.09%.

Now, let's consider whether this healthcare giant is a stock to buy -- or whether it's too late after recent gains. It's true that UnitedHealth isn't completely out of the woods. The insurance giant is still in the recovery phase and must manage various challenges. The path to growth may not be completely linear and full results may not happen overnight.

A fantastic moat

But it's important to note that UnitedHealth offers investors certain positive elements. It has a fantastic moat, or competitive advantage, as the country's insurance leader. And its combination of insurance and services businesses -- UnitedHealthcare and Optum, respectively -- makes it difficult for another to unseat. UnitedHealth has also been proactive, taking quick action to turn things around, and we've already seen certain results.

Now, let's consider the stock's valuation. UnitedHealth trades at 23x forward earnings estimates, which is its highest level this year.

But the stock isn't particularly expensive if we look at a longer time period -- it traded at more than 32x estimates early last year.

Considering that UnitedHealth is in the early days of its recovery story, I would expect significant growth in the years to come -- and that means that it isn't too late to get in on the first half's top-performing mega-cap healthcare stock.

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