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Beyond UnitedHealth's Q3 Earnings: Time to Reevaluate & Sell Stock?
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Major healthcare plan provider, UnitedHealth Group Incorporated (UNH - Free Report) , last week posted strong third-quarter 2024 results, primarily fueled by growth in domestic commercial membership, value-based care expansion in Optum Health and new client wins at Optum Rx. However, this strong performance was partially overshadowed by rising medical costs and a decline in global commercial and Medicaid membership.
Increasing costs and tighter federal reimbursement rules have forced UnitedHealth to lower its outlook, falling short of consensus estimates. These challenges have led investors to expect that UNH's troubles could impact the broader industry as well.
Including the hiccup UnitedHealth witnessed following its earnings release, the stock has now declined 0.7% in the past month, while the industry has fallen 3.4%. Peers such as Elevance Health, Inc. (ELV - Free Report) and Humana Inc. (HUM - Free Report) have experienced steeper drops of 19.4% and 14.6%, respectively.In contrast, the S&P 500 Index has risen 2.3% during the same period.
UNH’s One-Month Price Performance
Image Source: Zacks Investment Research
Before delving into the underlying reasons for the troubled 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 third-quarter results.
UNH’s Q3 Earnings
UnitedHealth’s third-quarter 2024 adjusted earnings per share (EPS) of $7.15 beat the Zacks Consensus Estimate by 1.9%. The bottom line rose 9% year over year. Revenues reached $100.8 billion, which improved 9.1% year over year and outpaced the consensus mark by 1.3%.
The UnitedHealthcare business generated revenues of $74.9 billion in the quarter, a 7.2% year-over-year increase. Further, its Optum business line’s revenues were $63.9 billion, which rose 12.7% year over year. However, its medical care ratio was 85.2%, which deteriorated 290 basis points year over year. The metric came higher than the Zacks Consensus Estimate of 84.3%. Total operating costs of $92.1 billion escalated nearly 10% from a year ago.
UnitedHealth has adjusted its projections for 2024, lowering its expected net adjusted EPS to a range of $27.50-$27.75, down from the previous outlook of $27.50-$28.00. It expects to incur direct response costs of $2.15 per share this year for the Change Healthcare cyberattack, up from the previous view of $1.3-$1.35. Additionally, the company foresees a business disruption cost of 75 cents per share, compared to the previous estimate of 60-70 cents.
Looking ahead to 2025, UnitedHealth projects adjusted earnings to reach around $30 per share at the top end, which falls short of the Zacks Consensus Estimate of $30.37. These downward revisions in both 2024 and 2025 earnings estimates have raised concerns among investors, leading to significant market reactions. During the past week, its 2024 and 2025 earnings estimates have witnessed major downward revisions each.
Image Source: Zacks Investment Research
Nevertheless, management expects to outperform its preliminary estimates.
Some Challenges & Their Remedies
Key issues include lower payments from the U.S. government's Medicare insurance program for the elderly and cuts to state Medicaid programs, alongside rising medical costs. The Biden administration's proposed changes to the Medicare Advantage program are expected to affect UnitedHealth's revenue growth.
While the company could have considered cutting expenses to preserve margins, the surge in medical costs that started last year, partly driven by the lingering effects of the pandemic, is unlikely to subside soon. Contributing to these rising costs are aggressive billing by hospitals and states reducing Medicaid coverage, which puts additional strain on the margins.
In response to these challenges, insurers may increasingly shift to cheaper medication alternatives that are still effective. UnitedHealth's efforts to reduce inpatient stays and facilitate safe discharges should help save money. Additionally, the company is likely to continue focusing on reducing overall operating expenses to manage its financial pressures more effectively in the coming years.
Should You Stick With UNH Stock Now?
While an immediate solution to UnitedHealth's challenges seems unlikely, the company — and the health insurance industry as a whole — will likely focus on cost-cutting measures and lobbying for improved government rates over the long term. As government-backed programs continue to cause strains, insurers are expected to raise premiums in the commercial market, which may help offset some of the negative impacts.
Additionally, the company's cost estimates tied to the Change Healthcare cyberattack continue to rise. UnitedHealth has already extended billions of dollars in interest-free loans and advance payments to clients to alleviate the fallout from the attack. This attack has triggered an investigation by the U.S. Department of Health and Human Services into potential violations of patient data protection laws. Apart from the direct costs of the hack, UnitedHealth is expected to increase spending on cybersecurity moving forward.
UnitedHealth's rising debt burden is concerning. Its long-term debt, less of current maturities, stood at a significant $74.1 billion at the third quarter end (up 27.2% from the figure as of Dec. 31, 2023), with a long-term debt-to-capital ratio of 44.06%, higher than the industry average of 38.26%.
Image Source: Zacks Investment Research
Another concern is that the rising medical costs continue to catch health insurers off guard, including UNH, as they seem to lack a full understanding of the situation. As such, potential investors may be cautious, waiting on the sidelines until there is more clarity on how these cost pressures will be managed.
From a valuation perspective, UNH appears expensive relative to its peers. Its forward 12-month price-to-earnings ratio is currently 19.09X compared to the industry average of 16X, suggesting the stock is trading at a premium. Moreover, the stock is trading below its 50-day moving average, signaling downward momentum.
Image Source: Zacks Investment Research
Given these challenges — rising costs, valuation concerns, limited upside potential, and downward earnings estimate revisions — current investors might consider booking profits now. The company currently has a Zacks Rank #4 (Sell).
Image: Bigstock
Beyond UnitedHealth's Q3 Earnings: Time to Reevaluate & Sell Stock?
Major healthcare plan provider, UnitedHealth Group Incorporated (UNH - Free Report) , last week posted strong third-quarter 2024 results, primarily fueled by growth in domestic commercial membership, value-based care expansion in Optum Health and new client wins at Optum Rx. However, this strong performance was partially overshadowed by rising medical costs and a decline in global commercial and Medicaid membership.
Increasing costs and tighter federal reimbursement rules have forced UnitedHealth to lower its outlook, falling short of consensus estimates. These challenges have led investors to expect that UNH's troubles could impact the broader industry as well.
Including the hiccup UnitedHealth witnessed following its earnings release, the stock has now declined 0.7% in the past month, while the industry has fallen 3.4%. Peers such as Elevance Health, Inc. (ELV - Free Report) and Humana Inc. (HUM - Free Report) have experienced steeper drops of 19.4% and 14.6%, respectively.In contrast, the S&P 500 Index has risen 2.3% during the same period.
UNH’s One-Month Price Performance
Before delving into the underlying reasons for the troubled 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 third-quarter results.
UNH’s Q3 Earnings
UnitedHealth’s third-quarter 2024 adjusted earnings per share (EPS) of $7.15 beat the Zacks Consensus Estimate by 1.9%. The bottom line rose 9% year over year. Revenues reached $100.8 billion, which improved 9.1% year over year and outpaced the consensus mark by 1.3%.
The UnitedHealthcare business generated revenues of $74.9 billion in the quarter, a 7.2% year-over-year increase. Further, its Optum business line’s revenues were $63.9 billion, which rose 12.7% year over year. However, its medical care ratio was 85.2%, which deteriorated 290 basis points year over year. The metric came higher than the Zacks Consensus Estimate of 84.3%. Total operating costs of $92.1 billion escalated nearly 10% from a year ago.
The UnitedHealthcare business catered to 50.7 million people as of Sept. 30, 2024, which fell 4% year over year. For a detailed analysis, read our blog: UnitedHealth Q3 Earnings Beat on Domestic Commercial Business.
UNH Falling Short of Expectations?
UnitedHealth has adjusted its projections for 2024, lowering its expected net adjusted EPS to a range of $27.50-$27.75, down from the previous outlook of $27.50-$28.00. It expects to incur direct response costs of $2.15 per share this year for the Change Healthcare cyberattack, up from the previous view of $1.3-$1.35. Additionally, the company foresees a business disruption cost of 75 cents per share, compared to the previous estimate of 60-70 cents.
Looking ahead to 2025, UnitedHealth projects adjusted earnings to reach around $30 per share at the top end, which falls short of the Zacks Consensus Estimate of $30.37. These downward revisions in both 2024 and 2025 earnings estimates have raised concerns among investors, leading to significant market reactions. During the past week, its 2024 and 2025 earnings estimates have witnessed major downward revisions each.
Nevertheless, management expects to outperform its preliminary estimates.
Some Challenges & Their Remedies
Key issues include lower payments from the U.S. government's Medicare insurance program for the elderly and cuts to state Medicaid programs, alongside rising medical costs. The Biden administration's proposed changes to the Medicare Advantage program are expected to affect UnitedHealth's revenue growth.
While the company could have considered cutting expenses to preserve margins, the surge in medical costs that started last year, partly driven by the lingering effects of the pandemic, is unlikely to subside soon. Contributing to these rising costs are aggressive billing by hospitals and states reducing Medicaid coverage, which puts additional strain on the margins.
In response to these challenges, insurers may increasingly shift to cheaper medication alternatives that are still effective. UnitedHealth's efforts to reduce inpatient stays and facilitate safe discharges should help save money. Additionally, the company is likely to continue focusing on reducing overall operating expenses to manage its financial pressures more effectively in the coming years.
Should You Stick With UNH Stock Now?
While an immediate solution to UnitedHealth's challenges seems unlikely, the company — and the health insurance industry as a whole — will likely focus on cost-cutting measures and lobbying for improved government rates over the long term. As government-backed programs continue to cause strains, insurers are expected to raise premiums in the commercial market, which may help offset some of the negative impacts.
Additionally, the company's cost estimates tied to the Change Healthcare cyberattack continue to rise. UnitedHealth has already extended billions of dollars in interest-free loans and advance payments to clients to alleviate the fallout from the attack. This attack has triggered an investigation by the U.S. Department of Health and Human Services into potential violations of patient data protection laws. Apart from the direct costs of the hack, UnitedHealth is expected to increase spending on cybersecurity moving forward.
UnitedHealth's rising debt burden is concerning. Its long-term debt, less of current maturities, stood at a significant $74.1 billion at the third quarter end (up 27.2% from the figure as of Dec. 31, 2023), with a long-term debt-to-capital ratio of 44.06%, higher than the industry average of 38.26%.
Another concern is that the rising medical costs continue to catch health insurers off guard, including UNH, as they seem to lack a full understanding of the situation. As such, potential investors may be cautious, waiting on the sidelines until there is more clarity on how these cost pressures will be managed.
From a valuation perspective, UNH appears expensive relative to its peers. Its forward 12-month price-to-earnings ratio is currently 19.09X compared to the industry average of 16X, suggesting the stock is trading at a premium. Moreover, the stock is trading below its 50-day moving average, signaling downward momentum.
Given these challenges — rising costs, valuation concerns, limited upside potential, and downward earnings estimate revisions — current investors might consider booking profits now. The company currently has a Zacks Rank #4 (Sell).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.