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UnitedHealth (UNH) Earnings Preview: Navigating Rising Costs and Strategic Expansions

AInvestMonday, Jul 15, 2024 8:24 pm ET
2min read

UnitedHealth Group Inc. (NYSE: UNH) is set to release its Q2 earnings report tomorrow before the market opens, with an earnings call scheduled for 8:45 AM ET.

The healthcare giant is expected to report adjusted EPS of $6.66, reflecting an 8% year-over-year growth, and revenues of $98.73 billion, representing a 6% increase.

As investors prepare for the announcement, several critical factors and trends will shape the market's reaction to the results.

Focus on Rising Costs

A key area of concern for UnitedHealth is rising costs, particularly evident in the company's medical care ratio (MCR). The MCR, which measures the percentage of premium revenue spent on medical claims, has been hovering within the company's target range of 83.5-84.5%.

A lower MCR indicates that premium revenues are adequately covering costs, while a rising MCR suggests that expenses are increasing at a faster pace.

In the last quarter, UnitedHealth reported an MCR of 84.3%, a slight improvement from the 85.0% reported in Q4. This decline was well-received by investors, and maintaining or further reducing the MCR could spur positive sentiment.

However, a cyberattack on UnitedHealth's Change Healthcare division disclosed in February has added to the company's costs, pushing the MCR 40 basis points higher last quarter. The impact of this attack on FY24 EPS is estimated to be between $1.15 and $1.35.

Regulatory and Market Challenges

Another challenge for UnitedHealth comes from the Centers for Medicare & Medicaid Services (CMS), which decided to keep its 2025 Medicare Advantage (MA) rate unchanged. This decision could pressure UnitedHealth to absorb higher costs as more seniors opt for MA plans.

Despite this, UnitedHealth has expressed confidence in its strategy, noting that the phased implementation of new reimbursement rules over three years aligns with its long-term plans.

Earnings Outlook and Revenue Performance

Despite these headwinds, UnitedHealth reiterated its FY24 EPS outlook of $27.50-28.00 last quarter. Reaffirming or raising this target in the Q2 report would likely be viewed positively by investors, although maintaining the current guidance amidst ongoing uncertainties would not be surprising.

UnitedHealth's revenue growth has consistently outperformed analyst estimates, driven by the strong performance of its OptumRX business.

OptumRX has been a cornerstone of UnitedHealth's growth, benefiting from an increasing number of patients served. The company aims to reach 5 million patients in value-based care by the end of FY24, which could provide a significant boost to its top line.

Strategic Acquisitions and Market Position

UnitedHealth is also in the process of closing its acquisition of Amedisys (AMED), expected to be finalized in the second half of 2024. The $3.3 billion acquisition aims to expand UnitedHealth's home healthcare business.

Although Amedisys' $2.23 billion in FY23 revenues are relatively minor compared to UnitedHealth's $369 billion, the acquisition represents a strategic move to enhance its service offerings and market position.

Stock Performance and Market Sentiment

UnitedHealth's stock performance has been mixed in 2024. The stock experienced a decline in the first few months of the year, reaching a bottom before Q1 results sparked a rally, leading to a 15% increase.

However, on a year-to-date basis, the stock remains slightly lower. The Q2 earnings report will be crucial in determining whether the recent positive momentum can be sustained.

Competitive Landscape

UnitedHealth's Q2 results will also set the tone for its peers' upcoming quarterly reports, including Elevance Health (ELV) on July 17, Molina Healthcare (MOH) on July 24, Centene (CNC) on July 26, and Humana (HUM) on July 31.

As a leader in the healthcare sector, UnitedHealth's performance and guidance will be closely watched by investors and analysts for insights into broader industry trends.

Conclusion

UnitedHealth's Q2 earnings report comes at a critical juncture, with rising costs, regulatory challenges, and strategic acquisitions all playing pivotal roles.

While maintaining or improving the MCR and reaffirming earnings guidance would be positive indicators, the market will also be looking for signs of continued revenue growth and successful integration of acquisitions.

Investors should closely monitor the Q2 results and the subsequent earnings call for updates on these key areas.

UnitedHealth's ability to navigate these challenges and capitalize on growth opportunities will be essential in sustaining its market leadership and delivering long-term value to shareholders.

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