What Trends Will Drive UnitedHealth’s Q3?

UnitedHealth Group (NYSE: UNH) is scheduled to report its Q2 2024 results on Tuesday, October 15. We expect UnitedHealth to post revenue of $99 billion and earnings of $6.95 on a per-share and adjusted basis, slightly below 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. However, the key metric to watch out for will be the medical costs, which have been on a rise lately. Not only do we expect UnitedHealth to post a downbeat quarter, we believe its stock is fully valued at $590. Our interactive dashboard analysis of UnitedHealth’s FY 2024Q3 Earnings Preview has more details on how the company’s revenues and earnings will likely trend for the quarter.

What Are The Key Trends To Drive UnitedHealth’s Q3 Results?

UnitedHealth should continue to benefit from an increase in total customers served for its insurance offerings, resulting in higher premiums. However, the Medicaid membership base may see a decline. The international business will also see a decline in membership and revenues due to the company’s exit from the Brazil market. UnitedHealth will likely continue to benefit from its value-based care offerings under the Optum segment. Optum Health has been driving the sales growth for the company lately, a trend expected to continue. OptumRx should also see higher sales amid drug price inflation and more number of scrips filed. These factors combined will likely result in an 8% y-o-y uptick in the company’s top-line in Q3.

Looking at profitability, UnitedHealth has seen a decline in its net margins lately, due to higher medical costs. We think UnitedHealth’s medical care ratio will likely see a 200 bps y-o-y rise in Q3. Furthermore, there will also be an impact on earnings from the cyber attack on the Change Healthcare business earlier this year. These factors will likely lead to earnings growth being slower than the sales growth for the quarter.

How Did UnitedHealth Perform In Q2?

UnitedHealth Group’s revenue of $98.9 billion reflects a 6% y-o-y growth driven by a 5% rise in UnitedHealthcare and a 12% jump in Optum segment sales. The company’s medical care ratio stood at 85.1% in Q2, reflecting a 190 bps rise y-o-y. The company saw its adjusted operating margin remain stable y-o-y at 8.7%. It recorded a $0.92 per share impact from the cyber attack in Q2. However, the amount for the full-year is expected to be in the range of $1.90 and $2.05 per share. Higher revenues and stable operating margin, clubbed with a 1.3% decline in total shares outstanding, led to an 11% y-o-y rise in the bottom line to $6.80 on a per-share and adjusted basis.

What Does This Mean For UNH Stock?

We expect UNH stock to trade lower next week, based on our view that the company will post revenues and earnings lower than the street expectations. However, investors will be closely monitoring the medical care ratio. While we anticipate a 200 bps deterioration in this metric, any meaningful deviation or a revision in earnings expectations for the full-year will likely define the near-term stock price movement for UnitedHealth.

We currently estimate UnitedHealth Group’s Valuation to be $580 per share, close to its current levels of $590. Our forecast is based on a 21x P/E multiple for UNH and expected earnings of $27.55 on a per-share and adjusted basis for the full year 2024. The 21x P/E ratio aligns with the stock’s average over the last three years. The company expects its earnings to be in the range of $27.50 to $28.00 in 2024.

Notably, UNH is one of a handful of stocks that have increased their value in each of the last three years, but that still wasn’t enough for it to consistently beat the market. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is less volatile. And it 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.

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