Has UnitedHealth Group Inc. (UNH) Become the Backbone of Wall Street?

On July 14,UnitedHealth Group Incorporated (UNH) released its earnings for the fiscal second quarter ended June 30, 2023. Despite concerns regarding rising medical costs and a surge in demand for non-urgent surgeries overdue because of the pandemic, the Minnesota-based diversified healthcare company topped Street estimates on both top and bottom lines.

In addition to revenue and adjusted EPS of $92.9 billion and $6.14 surpassing analyst estimates of $91.01 billion and $5.99, respectively, UNH raised its full-year adjusted earnings guidance to $24.70 to $25.00 per share, from the previous forecast of $24.50 to $25.00 per share.

The impressive results were reflected in UNH’s price action. The stock popped as high as 7.2% intraday to close the session at around $480 and a market capitalization of around $447 billion, making UNH the largest healthcare company in the United States and a bellwether for the broader insurance sector.
After adjusting for inflation, UNH has increased its annual revenue by more than $100 billion since 2012 to become even bigger than JP Morgan Chase & Co. (JPM) , the nation’s largest bank.

Ana Gupte, principal at AG Health Advisors, gave UNH her vote of confidence by saying, “If I had to pick one stock, only one stock to buy, I’d buy United[Health].” In addition to being in the healthcare sector, which is largely immune to economic downturns, according to Gupte, UNH’s size “makes it very attractive from an economic cycle and a macro environment perspective.”

With its size, performance, and stability (reflected in its 2-year and 5-year betas of 0.50 and 0.66, respectively), UNH has unsurprisingly become Wall Street’s darling with the highest weight in the Dow Jones Industrial Average and the tenth heaviest weightage in the S&P 500.

According to Lance Wilkes, managing director and senior research analyst at Bernstein Research, UNH “has had superior stock performance over everybody else for two reasons. One would be strategic vision, and the other is strategic capital management.”

While its peers, such as Aetna and Humana or Anthem and Cigna, have had their attempted consolidation through horizontal integration blocked by regulators due to antitrust concerns, UNH’s unique vertical-integration strategy, the kind being employed by Microsoft Corporation (MSFT) andActivision Blizzard , Inc. (ATVI), has meant that it could go about making smaller deals which have organically grown over time.

The company’s capital discipline has been reflected in its trailing-12-month ROCE, ROTC, and ROTA of 26.35%, 13.13%, and 7.53%, compared to the respective industry averages of -42.29%, -22.86%, and -33.16%.

As a result, through its various business segments, UNH has created an ecosystem that serves the entire healthcare value chain end-to-end while making the whole more than just a sum of its parts.

UnitedHealthcare provides insurance coverage and benefits services to more than 50 million people, while the company’s other platform, Optum, offers health services. The latter runs one of the largest pharmacy benefit managers or intermediaries who negotiate drug discounts with drug manufacturers on behalf of health insurers and large employers, which helps the former by reducing the cost of coverage.

As a result, UNH has achieved EBITDA and net-income margins of 9.55% and 6.06%, respectively, which are significantly higher than the respective industry averages.

Temporary Tailwinds

Insurance companies have benefited from delays in non-urgent procedures due to hospital staffing shortages and the pandemic, which deemed healthcare centers too risky for elective procedures.
However, as alluded to at the beginning of the article, UNH’s medical cost ratio, the percentage of payout on claims compared with premiums, despite being lower than Street estimates, came in at 83.2%, up over the prior-year quarter.

UNH has attributed this uptick to elective surgeries and outpatient care activity, primarily among seniors getting overdue heart procedures and hip and knee replacements at outpatient clinics.
According to CFO John Rex, the medical cost ratio is expected to “be a little bit lower” in the third quarter compared with the second quarter while being “higher marginally” than it will be in the fourth quarter, being “just a seasonality factor.”

Bottom line

Regardless of marginal increases in the medical cost ratio, UNH’s revenue and EPS for the fiscal third quarter ending September 30, 2023, are expected to increase by 12.9% and 9.8% year-over-year to $91.30 billion and $6.36, respectively.

For the entire fiscal year, revenue and EPS are expected to increase by 13.2% and 11.9% year-over-year to $366.85 billion and $24.83, respectively.

Given such solid prospects, healthcare companies, such as UNH, as Lance Wilkes put it, “are becoming more and more [like] utilities.”