UnitedHealth's Beat and Raise Is a Bullish Sign
The ideal earnings report is usually one where the company is able to beat estimates for both revenue and earnings per share and then raise guidance for the remainder of the year.
In such a scenario, the company has outperformed Wall Street analysts estimates as well as its own guidance. To me, the most bullish case that a stock can have is when those running the company and the analysts that follow it have seen their estimates beaten. This often leads to a raise of forward guidance when estimates are beaten by a wide margin.
UnitedHealth Group (NYSE:UNH) recently reported just such a quarter where earnings results easily topped expectations. The company also raised its guidance for the remainder of the year. Lets look closer at UnitedHealth to see why I believe the market is underestimating this company.
Earnings highlights
UnitedHealth reported second-quarter earnings results on July 15. Revenue grew 12.6% to $80.3 billion, beating estimates by $652 million. Adjusted earnings per share of $5.57 compared to $4.70 per share in the prior year and was 37 cents above expectations. Earnings from operations grew more than 18% year-over-year to $7.1 billion. Both reporting segments, UnitedHealthcare and Optum, had double-digit gains.
UnitedHealthcare, which offers health care benefits to individuals and employers as well as Medicare and Medicaid beneficiaries, grew 12% to $62.1 billion. This segment saw an additional 280,000 customers added to coverage plans. In total, UnitedHealthcare has added more than 600,000 people to commercial benefit offerings so far in 2022.
Revenue for Optum, which has a goal of lowering health care costs through the optimization of care, increased 18% to $45.1 billion.
The medical care ratio, which measures how much of customer premiums are used to pay medical claims, improved 130 basis points to 81.5%. A figure under 85% is usually the target.
UnitedHealth repurchased $4 billion worth of stock during the quarter, bringing total buybacks to $8 billion through the first half of 2022. The company also raised its dividend 14% for the June 28 payment date, extending its dividend growth streak to 13 years.
Leadership provided revised guidance for the remainder of the year. The company now expects adjusted earnings per share of $21.40 to $21.90 for 2022, up from $21.20 to $21.70 previously. The new midpoint would be a nearly 14% increase from the prior year. This is close to UnitedHealths compound annual growth rate of 15.3%.
Takeaways
Second-quarter results were strong in their own right, but UnitedHealth posted almost 15% revenue growth in the same period of 2021. This was the fifth consecutive quarter of double-digit revenue gains. Cleary, the company has been on a roll, putting up consistently good results over the near-term.
UnitedHealth is the largest health insurer in the U.S., but the company continues to take market share. Following the addition of customers last quarter, the company now serves more than 26 million people in the U.S. This affords the company a size and scale that few can match.
Company leadership projects that it will add a total of 800,000 customers to its Medicare Advantage rolls, which would be UnitedHealths seventh year of growth in this area.
Optum, though the smaller of the two business segments, has become a real source of strength for UnitedHealth as there is real appeal for customers to lower health care costs. The second-quarter growth rate was actually an acceleration from the prior year, where Optum posted a 17.1% increase in revenue. Revenue for Optum grew 4.2% on a sequential basis.
Growth for Optum was powered by all businesses, led by a 30% gain in Optum Healths revenue per customer for the period. This was achieved through a higher number of people served and an increase in the number of care services offered. Optum Insights technology and data analytics services remain in high demand, as seen by the backlog swelling $2.3 billion from last year to $23.6 billion. Adjusted prescriptions for Optum Rx grew 4.4% to 357 million for the quarter. Optum, with its goal of lowering health care costs, should continue to see heightened demand from customers.
Based on results in both segments, the company raised its guidance slightly for the year, demonstrating leaderships belief that the business strength seen in recent quarters is likely to persist throughout the remainder of 2022. Projected adjusted earnings per share growth fits in with UnitedHealths long-term guidance of 13% to 16% growth.
While current market conditions might be worrisome as inflation hits levels not seen in decades and the Federal Reserve aggressively raises interest rates, investors should take comfort that the health care sector is likely to be one of the more recession resistant areas of the economy. People will likely prioritize their health care even in an economic downturn.
This is true for health insurers in general and UnitedHealth in particular. The companys business segments continue to see double-digit revenue growth, driving the beat of both top- and bottom-line estimates. Optum is especially important given demands to lower health care costs.
This plus the companys leading position in health care insurance should provide tailwinds for UnitedHealth in the future.
Valuation analysis
Given the success of the company it would stand to reason that UnitedHealth would trade with a premium valuation.
Shares of UnitedHealth closed Mondays trading session at $529.75, implying a forward price-earnings ratio of 24.5 using the midpoint of revised guidance. The stock has five- and 10-year average price-earnings ratios of 18.7 and 16.7, respectively.
UnitedHealth is trading at a premium to its GF Value chart.
UnitedHealth has a GF Value of $408.37, giving the stock a price-to-GF-Value ratio of 1.30. The stock would have to fall 23% to reach its GF Value. UnitedHealth is rated as modestly overvalued by GuruFocus.
Final thoughts
Delivering results that top estimates for both revenue and earnings show that a company is outperforming what leadership and analysts had expected. Adding in a raise of forward guidance provides evidence that the current trends are likely to persist for the remainder of the year.
This is a bullish set up for UnitedHealth, in my opinion, as the company has had sustained success which doesnt appear to be slowing. Shares are not cheap, but beating estimates and raising guidance should be taken as an excellent sign. Thus, despite the overvaluation, I remain bullish on UnitedHealth.
This article first appeared on GuruFocus.
