Will The Q1 Medical Care Ratio Define The Move In UnitedHealth Stock?

UNH: UnitedHealth Group logo
UnitedHealth Group

UnitedHealth Group (NYSE: UNH) is scheduled to report its Q1 2024 results on Tuesday, April 16. We expect UnitedHealth to post revenue of $99.7 billion and earnings of $6.75 on a per-share and adjusted basis, aligning with the street expectations. The company will likely continue to benefit from the increased contribution of the Optum Health business, while its health insurance business should benefit from increased memberships. Investors will be closely monitoring the medical costs in Q1, as the company’s management expects a rise in this metric in the near term. Although we expect UnitedHealth to post in-line results in Q1, we believe there is ample room for its stock to grow from its current levels of under $460. Our interactive dashboard analysis of UnitedHealth’s Earnings Preview has more details on how the company’s revenues and earnings will likely trend for the quarter. So, what are some of the trends that are likely to drive UnitedHealth’s results?

Firstly, let us look at UNH stock performance in recent years. UNH stock has shown gains of 30% from levels of $350 in early January 2021 to around $460 now, vs. an increase of about 40% for the S&P 500 over this roughly three-year period. However, the increase in UNH stock has been far from consistent. Returns for the stock were 43% in 2021, 6% in 2022, and -1% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that UNH underperformed the S&P in 2023.

In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for other heavyweights in the Health Care sector including LLY, JNJ, and MRK, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

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Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could UNH face a similar situation as it did in 2023 and underperform the S&P over the next 12 months — or will it see a strong jump? From a valuation perspective, we think UNH stock is attractive. We estimate UnitedHealth’s Valuation to be $605 per share, reflecting over 30% upside from its current levels of $460. Our forecast is based on a 22x P/E multiple for UNH and expected earnings of $27.70 on a per-share and adjusted basis for the full year 2024. This compares with the last three-year average of 21x. The company expects its earnings to be in the range of $27.50 to $28.00 in 2024.

Coming to the latest quarter, UnitedHealth should continue to benefit from an increase in total customers served for its insurance offerings as well as the Optum segment. However, there has been an increase in elective surgeries, resulting in increased medical costs for insurance companies. This trend is expected to continue in the near term. We estimate the medical care ratio to rise to levels of over 84% in Q1’24, versus 82% in the prior-year quarter.

Looking at the previous quarter, UnitedHealth Group’s revenue of $94.4 billion reflected a 14% y-o-y growth driven by a 12% rise in UnitedHealth and a 24% jump in Optum sales. The company reported a 3.7% rise in total UnitedHealthcare Medical customers, a 3% rise in Optum Health customers served, and a 7.4% growth in Optum Rx scripts. The company saw its operating margin decline by 20 bps to 8.1%. While the UnitedHealth segment operating margin contracted by 30 bps, Optum segment margins contracted by 60 bps due to increased investments to enhance patient services. Higher revenues and slightly lower operating margin, clubbed with a 1% decline in total shares outstanding, led to a 15% y-o-y rise in the bottom line to $6.16 on a per-share and adjusted basis.

There are near-term headwinds for the company, primarily rising medical costs. Furthermore, the U.S. Centers for Medicare & Medicaid Services said Medicare Advantage payments would rise by an average of 3.7% in 2025, falling short of the street expectations. That said, we think these factors are already priced in, with UNH stock seeing almost a 15% fall year-to-date. While the Q1 EPS will be a key figure to watch for, it is likely that UNH stock may react more to how the medical care ratio pans out during the quarter. A higher than expected rise in this metric may prompt UnitedHealth to lower its guidance, which may not bode well for its stock. On the other hand, any respite in the medical costs will be welcomed and likely result in a stock rebound.

While UNH stock appears undervalued, it is helpful to see how UnitedHealth Group Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

Returns Apr 2024
MTD [1]
YTD [1]
Total [2]
 UNH Return -7% -13% 187%
 S&P 500 Return -1% 9% 133%
 Trefis Reinforced Value Portfolio -1% 5% 648%

[1] Returns as of 4/10/2024
[2] Cumulative total returns since the end of 2016

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