Three Reasons UnitedHealth Group Inc. (UNH) Could Lose Steam

Could UnitedHealth Group Inc. (NYSE:UNH) stock jump 40% over the next two years? A recent article in Barron’s says it could happen. Shares of the large insurer have gained 20% over the past year. All UnitedHealth would need to do is maintain those growth levels for another couple of years.

A lot can happen to derail both present and prognosticated momentum, though. Here are three reasons why UnitedHealth Group Inc. (NYSE:UNH) might stall more than surge.

1. Earnings growth

UnitedHealth Group Inc. (NYSE:UNH) has enjoyed a terrific run over the last few years. Those gains have been powered by solid earnings growth. However, that growth now appears to be tapering off.

UNH Net Income TTM data by YCharts.

Over the last five years, UnitedHealth Group Inc. (NYSE:UNH) saw annual earnings growth of almost 15%. Analysts project that the company will experience lower annual growth rates close to 11% over the next five years. For this year, UnitedHealth is expected to grow earnings by only 3%. The projections increase to 7% next year, but that’s still a far cry from recent levels.

2. Valuation

The hefty gains for UnitedHealth Group Inc. (NYSE:UNH) have also resulted in a hefty relative valuation. The company’s trailing price-to-earnings ratio of around 13 roughly matches that of Aetna Inc. (NYSE:AET) but stands higher than other major rivals. Humana Inc (NYSE:HUM) has a P/E multiple of 9.4. WellPoint, Inc. (NYSE:WLP)‘s P/E ratio is 9.7.

Using another valuation metric yields similar results. UnitedHealth’s enterprise value/EBITDA is 7.2. Aetna Inc. (NYSE:AET) lags behind with an EV/EBITDA of 6.2. The values for Humana Inc (NYSE:HUM) and WellPoint, Inc. (NYSE:WLP) are much lower — 2.4 and 3.5, respectively.

Of course, there are plenty of reasons why UnitedHealth warrants a higher valuation than some of its peers. The fast-growing Optum business unit, which includes pharmacy benefits management and health information technology services, ranks near the top of the list. Neither Aetna, Humana, nor WellPoint boasts a division as strong as Optum.

However, UnitedHealth isn’t just pricey compared to some of its rivals. It’s expensive compared to its own recent history.

UNH EV / EBITDA TTM data by YCharts.

The key issue for UnitedHealth is that valuation levels are the highest in years at the same time that earnings growth is expected to taper off. That’s not a recipe for huge stock gains.