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.”

Inflation Eases: Stocks to Watch Amid Q2 Financial Earnings

After an eventful year, corporate America's crème de la crème is set to kick off the second-quarter earnings season.

The performance of banking majors, such as JP Morgan Chase & Co. (JPM), Wells Fargo & Company (WFC), and Citigroup, Inc. (C), which are scheduled to report on Friday, July 14, would be indicative of the overall health of the economy. Their numbers, specifically deposit flows and loan growth, might impact the share prices of regional banks, which attracted much-unwanted attention earlier in the year.

As the economy seems to be finding its way into calmer waters with a greater-than-expected moderation of inflation, before we discuss the outlook for the trio of major banks ahead of their earnings release, for the uninitiated, here’s a brief recap of upheavals they had to live through and work their way around over the past year.

How We Got Here?

As the “transitory” inflation in the aftermath of the beginning of the armed conflict in Ukraine morphed into a not-so-transitory and vicious feedback loop that resulted in decades-high inflation, the Federal Reserve and other major central banks chose to respond with aggressive interest-rate hikes.

While the increased borrowing costs took the wind out of the sails of an overheating economy, it resulted in significant markdowns in the “ultra-safe” long-term U.S. Treasury securities in which many of the regional banks had invested their mushrooming deposits of cash, mostly received as stimulus during the pandemic.

However, as the going got tough for various businesses amid increased borrowing costs, the banks’ clients began to dip into their deposits. In such a scenario, to meet its payment obligations, the banks’ mark-to-market losses rapidly crystallized into realized ones.

Consequently, Silicon Valley Bank (SBV) announced that it booked a $1.8 billion loss, and the chaos and panic triggered by its failure wiped out a combined $52 billion in the market value of JP Morgan Chase & Co. (JPM), Bank of America Corporation (BAC), Wells Fargo & Company (WFC), and Citigroup, Inc. (C).

Credit Suisse and First Republic Bank became two other casualties, which JPM and UBS proactively absorbed.

The banking turmoil proved to be teasers to a similar, but orders of magnitude larger, scare. As the U.S. Treasury looked set to exhaust its ‘extraordinary measures’ to manage the national debt by June 5, the world’s richest economy, which also issues the global reserve currency, was projected to run out of cash and fail to meet its obligations, until the self-imposed debt ceiling was raised or suspended.

With the extent to which the U.S. and global economy could be undermined if the default comes to pass deemed by treasury secretary Janet Yellen an “economic catastrophe,” it is not difficult to understand why business leaders, such as JPM Chief Jamie Dimon, convened a ‘war room’ over the debt ceiling standoff.

However, calmer and more rational heads prevailed in Washington, D.C., albeit at the eleventh hour. President Joe Biden and House Speaker Kevin McCarthy reached an agreement to suspend the current $31.4 trillion statutory debt ceiling until January 1, 2025, in exchange for discretionary spending caps for six years.

Where Are We Now?

Post the shakeups, all 23 banks successfully weathered the Federal Reserve’s annual stress test toward the end of the last month. Even in a severe recession scenario simulated in the test, the banks were able to maintain minimum capital levels, despite $541 billion in projected losses for the group while continuing to provide credit to the economy.

Given the endurance and resilience that was successfully displayed, an indication of lighter capital requirement resulted in banks, such as JPM, WFC, The Goldman Sachs Group, Inc. (GS), and Morgan Stanley (MS), using resources freed up to payout higher dividends to their shareholders.

JPM will lift its quarterly dividend to $1.05 a share from $1, while WFC will hike dividends to $0.35 from $0.30. Moreover, both banks have said that they have the capacity to repurchase shares. Despite an increase in minimum capital requirement from 12% of risk-weighted assets last year to 12.3% after this year’s test, C’s board has also approved a dividend increase from $0.51 per share to $0.53.

The stocks have gained over the past month, given the demonstrated staying power and the potential windfall for the shareholders.

The (Probable) Road Ahead

For the second quarter of the fiscal year:

JPM’s revenue and EPS are expected to increase by 32.1% and 37.7% year-over-year to $39.12 billion and $3.80, respectively.

WFC’s revenue and EPS are expected to increase by 22% and 39% year-over-year to $20.07 billion and $1.14, respectively.

C’s revenue is expected to increase by 8.3% year-over-year to $19.35 billion. However, its EPS is expected to decline by 38.7% over the prior-year period to $1.41.

While the outlook seems largely optimistic, some analysts have warned that large banks' earnings have peaked with continued declines in net interest incomes, normalization of credit costs, and increased expenses due to inflation.