UNH Preview: Watch for premium growth
UnitedHealth Group (UNH) is set to report its Q3 2024 earnings before the market opens on Tuesday, with analysts projecting EPS of $7.00 and revenue of $99.1 billion. UNH is the top weighted Dow Jones component at 8.81% so its results will influence that index. Goldman Sachs (6.54%) and Johnson & Johnson (2.70%) also report in the morning.
Shares of UNH are trading near all-time highs ($607). This looms as a key level for investors to track following its earnings.
Investors will closely watch for premium growth, particularly from its commercial membership base, and contributions from Optum Health and OptumRx. Analysts expect premium revenues to grow by around 6.1% year-over-year, driven by solid membership growth in its insurance business, although rising healthcare costs may pressure margins. Service revenues from Optum are anticipated to rise by 6%, while product revenues are forecast to grow by over 18%.
However, rising medical care costs and increased healthcare utilization may weigh on profitability. Analysts expect the medical care ratio (MCR) to increase by 200 basis points year-over-year, reflecting the impact of higher claims and utilization. Another key focus will be the fallout from the earlier cyberattack on Change Healthcare, which could further pressure earnings. This will likely result in slower earnings growth compared to the 8% revenue growth anticipated for the quarter, with any surprises in medical cost trends or guidance revisions potentially influencing the stock's performance post-earnings.
Looking ahead, the Medicaid membership base may show some decline, especially as UnitedHealth navigates an evolving regulatory environment, though its Medicare Advantage business is expected to remain resilient. Optum Health, which has been driving sales growth, is expected to continue its momentum, supported by increased demand for value-based care. OptumRx should also post gains, benefiting from drug price inflation and an increased number of prescriptions.
UnitedHealth (UNH) delivered a mixed Q2 report, navigating rising costs and a decelerating revenue growth rate while still managing to post a double-digit EPS beat. The company reiterated its FY24 adjusted EPS guidance of $27.50-28.00, signaling confidence in its long-term outlook despite mounting pressures. A cyberattack on Change Healthcare had a notable impact, reducing Q2 earnings by $0.92 per share and now expected to lower FY24 earnings by $1.90-2.05 per share. Additionally, the medical care ratio (MCR) increased by 190 basis points year-over-year to 85.1%, surpassing the previous forecast due to rising medical costs and changes in the Medicare Advantage (MA) mix. Still, UNH believes the current cost-related challenges are transitory, with margins expected to realign through the pricing cycle.
Revenue growth slowed to 6.4% in Q2 from 8.6% in Q1, reaching $98.86 billion, slightly above consensus estimates. Growth in Optum Health, with a 13% year-over-year increase in revenue, was a standout, while the UnitedHealthcare segment continued to see strong expansion in membership, especially in senior and complex care categories. Despite these positives, UNH’s operating margins in both its UnitedHealthcare and Optum units contracted, reflecting the strain from higher medical claims and employee costs. UNH reaffirmed its MCR forecast for the year, though now at the higher end of its range, and remains optimistic about its ability to navigate near-term pressures.
Overall, while UnitedHealth is expected to report a solid quarter, rising healthcare costs and the ongoing impact of the Change Healthcare cyberattack may lead to slower profit growth. Investors should watch for any updates on medical cost trends and full-year earnings guidance. Key peers to monitor include Elevance Health (ELV), Molina Healthcare (MOH), Centene (CNC), and Cigna (CI), as they navigate similar industry dynamics.