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UnitedHealth (UNH) Q2 Success: A Turnaround Worth Investing in?

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Last week, UnitedHealth Group Incorporated (UNH - Free Report) reported strong second-quarter 2024 results, driven by growth in domestic membership through UnitedHealthcare and value-based care arrangements via Optum. The improvedclarity on its outlook led to an 8.6% price increase since the release on Jul 16, 2024, reversing the 2.1% decline from the start of the yeartill the release.

Management addressed several uncertainties with the second-quarter earnings, including the impact of the cyberattack, the sale of South American operations and Medicare Advantage performance. This bolstered investor confidence and contributed to the stock’s positive movement.Thanks to the turnaround, UNH stock is now up 8.8% in the year-to-date period, outperforming the industry’s 4% growth. It is still lower than the S&P 500 Index’s 13.3% rally.

YTD Price Performance

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Before delving into the underlying reasons for the polished outlook and addressing the critical question of how investors should strategically position themselves regarding the stock, let’s first get a brief review of the second-quarter results.

Impressive Q2 Earnings

UnitedHealth’s second-quarter 2024 adjusted earnings per share (EPS) of $6.80 beat the Zacks Consensus Estimate by 2.3%. The bottom line rose 10.7% year over year. Revenues reached $98.9 billion, which improved 6.4% year over year and outpaced the consensus mark of $98.7 billion.

The UnitedHealthcare business generated revenues of $73.9 billion in the quarter, a 5.3% year-over-year increase. Further, its Optum business line’s revenues were $62.9 billion, which rose 11.7% year over year. These results underscore an improving performance across the operating segments, showcasing significant contributions from several areas of the business.

However, medical costs increased by 8.6% year over year to $65.5 billion in the second quarter. As seniors continue to resume elective procedures, this metric is expected to keep rising. For a detailed analysis, read our blog: UnitedHealth’s Q2 Earnings Beat on Strong Optum Unit.

Other companies in the sector that have already reported Q2 earnings are also showing promising future. Its peer, Elevance Health, Inc. (ELV - Free Report) , beat second-quarter earnings estimates on Carelon business strength. Another company, Molina Healthcare, Inc. (MOH - Free Report) , beat estimates on membership growth in each of its business lines.

A Clear Picture of Resilience?

So far, UnitedHealth offered more than $9 billion in interest-free loans and advance payments to its clients to mitigate the impact of the cyberattack. This move will likely bolster its reputation as an industry leader and help in client retention. The company now foresees a total reduction of $1.90 to $2.05 in its EPS due to the attack, higher than the previous outlook of $1.15 to $1.35. Despite the increase, investors now have a clearer picture of the effects of the attack.

Also, despite the massive disruption in business, management expects to stay on its 2024adjusted net EPStarget of $27.50 to $28.00, the mid-point of which indicates an improvement of 10.5% from the 2023 figure of $25.12. It views these negative events as one-offs that will not derail its long-term growth target of 13% to 16%.

The Zacks Consensus Estimate for 2024 bottom line is pegged at $27.68 per share, a 10.2% year-over-year increase. Also, the consensus mark for 2025 earnings is pegged at $31.20 per share, signaling further 12.7% growth. During the past week, its 2024 and 2025 earnings estimates have witnessed one upward estimate revision each and no movement in the opposite direction.

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The company also believes that the timing mismatch with Medicare will diminish as the year progresses. Although the medical care ratio was 85.1% in the second quarter — slightly high due to South American impacts and other costs — the company’s guidance suggests that current pressures will begin to ease. Meanwhile, its Optum business continues to add members and deliver on its promises.

Its shareholder-friendly moves are also a major indicator of its business strength. UNH prioritized diverting its resources towards care providers following the cyber hack from activities like share buybacks. Thanks to its robust financial strength, the company still expects to achieve its buyback guidance. Also, this June, it made a double-digit dividend hike for the 15th consecutive year.

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Overall, UNH is navigating its challenges effectively, maintaining a positive outlook for the future while demonstrating a strong commitment to its clients and shareholders.

There Are Hurdles

The cyberattack has prompted the U.S. Department of Health and Human Services to launch an investigation into the potential violations of patient data protection laws. Apart from the direct costs related to the hack, spending on cybersecurity is now expected to ramp up.

The company’s international business is under pressure. Revenues from UnitedHealthcare Global plunged nearly 53% in the first half of 2024, with membership declining more than 66% year over year. Nevertheless, the sale of South American operations is expected to have played a major role in this.

The company’s massive debt ($63.7 billion at second-quarter end) in a high interest rate environment continues to boost its interest expense. Following a 55.2% year-over-year jump in 2023, interest expense further increased more than 15% in the first half of 2024.

From a valuation standpoint, UnitedHealthappears pricey relative to the industry. Going by the price/earnings ratio, the company’s shares are currently trading at 18.96X forward earnings, higher than 16.46X for the industry and the stock’s five-year median of 18.86X.

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Wrapping Up: Keep On Holding

UnitedHealth Group’s future performance will largely depend on its ability to control expenses once the cyberattack-related costs are managed. Expenses are expected to rise due to increased spending on cybersecurity, interest and medical costs. New investors might want to wait for a better entry point, given the stock’s high valuation and other challenges.

Nevertheless, the continued rise in domestic commercial business is likely to support profit growth and mitigate expense increases. UNH’s strong second-quarter results highlight its growing strength in the Optum business. Its massive size, shareholder-friendly movesand strong outlook make this Zacks Rank #3 (Hold) company a worthy keep for existing shareholders. The resilience shown in operations following the cyberattack and the management's confidence instill further investor trust in the stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.


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