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UnitedHealth (NYSE:UNH) has experienced a rough year, with its share prices plummeting by about 40% year-to-date. This decline has pushed the stock’s price-to-earnings (P/E) ratio to levels not seen in over a decade. Initially, expectations were high for UnitedHealth, driven by anticipated positive outcomes from the Medicare Advantage underwriting cycle and the company's strong competitive position. However, those hopes have quickly faded.

The troubles began with disappointing first-quarter results, followed by an unexpected CEO change, suspended guidance, and underlying operational challenges. There have been rising costs for Medicare Advantage members and issues with under-coding for new Optum enrollees expected in 2024. Furthermore, a Wall Street Journal report revealed that the Department of Justice is investigating UnitedHealth for potential Medicare fraud, adding more pressure to the company's woes.

Despite these setbacks, some analysts see a significant investment opportunity. Matthew Gillmor of KeyBanc advocates for buying into the stock, believing it has dropped too much. Historically, UnitedHealth has traded at a forward P/E multiple of 17-19 times, but it currently sits around 12 times. Gillmor suggests that a more normalized long-term multiple of 14 times would indicate an EPS potential of about $21.50, which is significantly below the company's original 2025 guide by approximately $8.25 per share.

Gillmor attributes this gap to market concerns over Optum’s coding issues and margin pressures within the Medicare Advantage segment. He thinks the market’s stance is overly conservative, implying roughly 0% margins for Medicare Advantage, which he finds unsustainable in the long term.

However, there is optimism for improvement by 2026. Gillmor believes the necessary steps to address these challenges are already known: proposing more conservative Medicare Advantage bids in June and utilizing the HouseCalls program to enhance coding accuracy for new members. Partial success in these initiatives could boost earnings next year. For example, recovering $1.5 billion in Optum revenue and improving Medicare Advantage margins by 1% could add approximately $2.50 to EPS, a notable 11% increase compared to the 2025 consensus estimates.

While patience and dealing with uncertainty will be essential, Gillmor advises investors to hold their positions, as the current share price is seen as an attractive opportunity. He emphasizes that UnitedHealth, a leader among managed care organizations, is trading at a historically low valuation with depressed margins, making the 12-month outlook promising.

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