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UnitedHealth (UNH) Down 5.7% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research

It has been about a month since the last earnings report for UnitedHealth Group (UNH). Shares have lost about 5.7% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is UnitedHealth due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

UnitedHealth Beats on Q2 Earnings, Guides Up for 2019

UnitedHealth Group Inc.’ssecond-quarter 2019 earnings of $3.60 per share surpassed the Zacks Consensus Estimate by 4%. The same was up 15% year over year.

Higher revenues, strength in both segments — UnitedHealthcare and Optum — plus membership growth led to this outperformance.

UnitedHealth has a tradition of guiding conservatively and then surpassing its own estimates to surprise investors. The reported quarter was not an exception.

Strong Operating Performance

UnitedHealth posted revenues of $60.6 billion, which was in line with the Zacks Consensus Estimate. The same was up 8% year over year, led by double-digit growth at UnitedHealthcare Medicare & Retirement, OptumRx and OptumHealth.

Total operating cost of $55.9 billion was up 7.7% year over year, led by higher medical costs, cost of products sold and depreciation and amortization cost.  

The operating cost ratio of 13.9% improved 110 basis points year over year due to the deferral of the health insurance tax and strong cost management disciplines.

Strong Performance Across Segments

In the reported quarter, the company’s health benefits segment, UnitedHealthcare, generated revenues of $48.6 billion, up 6.1% year over year. Revenue growth was driven by higher enrollment and increase in pricing. All its business groups — Employer and Individual, Medicare and Retirement and Community and State — contributed to growth in earnings. Earnings from operations were up 12.1% year over year to $2.6 billion, led by revenue growth and cost control.

Revenues from Optum improved 13.4% year over year to $28 billion, reflecting strong contributions from the sub-segments — OptumHealth (up 20.3%), OptumInsight (7%) and OptumRx (11.7%). Earnings from operations jumped 13.8% year over year to $2.1 billion. Steady focus on accelerating growth, as well as improving margins and productivity through enhanced integration and business alignment, led to the segment’s overall improvement.

Membership Enrollment Increases

The company served 49.53 million people in the quarter, up 1.4% year over year. It was led by growth in members, served in the Commercial, Medicare and International segments, partially offset by lower Medicaid membership.

Capital Position Update

Cash flow from operations declined 26% year over year to $9.1 billion.
Cash and short-term investments at quarter-end were $17.3 billion, up 21% year over year.

Share Buyback and Dividend Payment

During the second quarter, dividend payments grew 20% year over year to $1 billion and $1.5 billion of shares were repurchased.

2019 Guidance Raised

Following a strong first-half 2019 performance, UnitedHealth moved up its 2019 adjusted earnings per share guidance to $14.70-$14.90 from $14.50-14.75, earlier.

 

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month.

VGM Scores

Currently, UnitedHealth has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision has been net zero. Notably, UnitedHealth has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.



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