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UnitedHealth's (UNH) Suffering Continues: Should You Hold Tight?
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The U.S. health insurance industry, commonly referred to as Health Maintenance Organization (HMO), is currently under pressure. UnitedHealth Group Incorporated (UNH - Free Report) , a massive player ($444.9 billion market cap) in the HMO space, has contributed its fair share in that downfall. The questions investors are now asking are: what is going wrong with the company? When will the downfall end? Is there a ray of sunshine on the horizon?
Let’s go through the headwinds first.
Over the year-to-date period, UnitedHealth shares declined 11.1% compared with the 10.1% and 3.7% fall of the HMO industry and the overall medical sector, respectively. Despite the medical sector’s pull, the Zacks S&P 500 composite has jumped 17.1% during this time, thanks to gains recorded primarily in information technology, as well as communication services sectors.
YTD Performance
Image Source: Zacks Investment Research
Last month, UnitedHealth leadership pointed out at the Goldman Sachs Global Healthcare Conference that seniors are now undergoing elective surgeries, which were delayed due to the pandemic. This is bound to accelerate medical costs. Our estimate for 2023 medical costs indicates almost 12% year-over-year growth, which will put pressure on margins.
Furthermore, higher operating costs and the cost of products sold will likely add to the woe. Our prediction for UNH's total operating costs for 2023 suggests an 11% increase from a year ago. Following UnitedHealth, another industry player, Humana Inc. (HUM - Free Report) , signaled a higher-than-expected increase in non-inpatient utilization trends, which will push its benefit expense ratio for the year toward the upper limit of its guided range of 86.3-87.3%.
UnitedHealth's international operations continue to witness a decline in membership growth. Even in the first quarter of 2023, membership in its international business dropped 3.7% year over year. This trend will likely affect its premium growth, putting pressure on its global business. Moreover, looking at its 12-month forward price-to-earnings multiple, investors might hesitate to pay any further premium. The company currently has a ratio of 17.86X, higher than the industry average of 16.72X.
This Too Shall Pass
The growth rate in medical costs is expected to gradually minimize as demand for elected procedures normalizes. Our estimate for UNH's 2024 medical costs suggests a little more than 1% year-over-year growth. This means more premiums will remain in hand after paying for the procedures for the health insurer.
Rising medical costs are nothing new for health insurers. To reduce the risks related to such events, the companies diversify their operations. As a prime example, UnitedHealth's Optum Health unit is likely to witness higher utilization, especially in ambulatory surgery operations, from the resumption of elective procedures. This will significantly offset the negatives being faced by UnitedHealthcare, its health benefits business.
Each sub-segment of Optum, UnitedHealth's health service business, is expected to continue delivering a solid performance, driving the overall segment's growth. Our estimate for 2023 operating income from the segment indicates an almost 11% year-over-year jump. Broadening of pharmacy care services and consistent strengthening of care delivery services will likely be the tailwinds for Optum's sub-segments.
UnitedHealth's financial strength enables it to navigate through tough times with ease. Its healthy balance sheet with cash and short-term investments of $46.5 billion at the first-quarter end was significantly higher than the short-term borrowings and current portion of long-term debt of $9.9 billion. Also, UNH's free cash flow after dividends in the trailing 12-month period soared 61% to $28 billion.
Its financial flexibility and operating strength allow it to boost shareholder values. Last month, UnitedHealth hiked its quarterly dividend by 14% to $1.88 per share, marking the 14th consecutive year of dividend hikes. It also has a well-established history of engaging in share repurchases. In the first quarter of 2023, the company rewarded its stakeholders with buybacks of $2 billion.
Rising Estimates
The Zacks Consensus Estimate for UnitedHealth's 2023 earnings is pegged at $24.86 per share, indicating a 12% year-over-year rise. The estimate remained stable over the past week. For 2024, the consensus mark suggests an 11.8% year-over-year jump. The company beat earnings estimates in all the last four quarters, with an average of 4%. The consensus estimate for 2023 revenues stands at $364.9 billion, suggesting 12.6% growth from a year ago.
Bottom Line
While UnitedHealth remains an appealing investment option for the long haul, thanks to its new deals, renewed agreements and expansion of service offerings and operations, short-term uncertainties persist. Washington's scrutiny of pharmacy benefit managers and concerns related to potential changes in Medicare and Medicaid are putting pressure on companies like UnitedHealth. Despite these near-term hiccups, UNH is worth holding onto. Those who haven't invested in the stock yet, could wait for a greater pullback and grab the stock at a better entry point.
UnitedHealth currently carries a Zacks Rank #3 (Hold).
Headquartered in Nashville, TN, HCA Healthcare operates hospitals and related healthcare entities. The company's prudent acquisitions, rising admissions, diversified business and capital deployment are expected to drive long-term growth.
The Zacks Consensus Estimate for HCA Healthcare’s 2023 earnings is pegged at $18.10 per share, indicating a 7.2% improvement from the year-ago level. The consensus estimate for HCA’s revenues in 2023 suggests a 5.3% year-over-year rise.
King of Prussia, PA-based Universal Health Services operates acute care hospitals, behavioral health centers and other facilities through its subsidiaries. Consistent top-line growth, strong capital position, accretive acquisitions and a solid acute care platform are key positives for the company.
The Zacks Consensus Estimate for Universal Health Services’ 2023 earnings is pegged at $10.27 per share, signaling 4% year-over-year growth. The consensus estimate for UHS’ revenues in 2023 is pegged at $14.1 billion, indicating a 5.4% increase from the year-ago level.
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UnitedHealth's (UNH) Suffering Continues: Should You Hold Tight?
The U.S. health insurance industry, commonly referred to as Health Maintenance Organization (HMO), is currently under pressure. UnitedHealth Group Incorporated (UNH - Free Report) , a massive player ($444.9 billion market cap) in the HMO space, has contributed its fair share in that downfall. The questions investors are now asking are: what is going wrong with the company? When will the downfall end? Is there a ray of sunshine on the horizon?
Let’s go through the headwinds first.
Over the year-to-date period, UnitedHealth shares declined 11.1% compared with the 10.1% and 3.7% fall of the HMO industry and the overall medical sector, respectively. Despite the medical sector’s pull, the Zacks S&P 500 composite has jumped 17.1% during this time, thanks to gains recorded primarily in information technology, as well as communication services sectors.
YTD Performance
Image Source: Zacks Investment Research
Last month, UnitedHealth leadership pointed out at the Goldman Sachs Global Healthcare Conference that seniors are now undergoing elective surgeries, which were delayed due to the pandemic. This is bound to accelerate medical costs. Our estimate for 2023 medical costs indicates almost 12% year-over-year growth, which will put pressure on margins.
Furthermore, higher operating costs and the cost of products sold will likely add to the woe. Our prediction for UNH's total operating costs for 2023 suggests an 11% increase from a year ago. Following UnitedHealth, another industry player, Humana Inc. (HUM - Free Report) , signaled a higher-than-expected increase in non-inpatient utilization trends, which will push its benefit expense ratio for the year toward the upper limit of its guided range of 86.3-87.3%.
UnitedHealth's international operations continue to witness a decline in membership growth. Even in the first quarter of 2023, membership in its international business dropped 3.7% year over year. This trend will likely affect its premium growth, putting pressure on its global business. Moreover, looking at its 12-month forward price-to-earnings multiple, investors might hesitate to pay any further premium. The company currently has a ratio of 17.86X, higher than the industry average of 16.72X.
This Too Shall Pass
The growth rate in medical costs is expected to gradually minimize as demand for elected procedures normalizes. Our estimate for UNH's 2024 medical costs suggests a little more than 1% year-over-year growth. This means more premiums will remain in hand after paying for the procedures for the health insurer.
Rising medical costs are nothing new for health insurers. To reduce the risks related to such events, the companies diversify their operations. As a prime example, UnitedHealth's Optum Health unit is likely to witness higher utilization, especially in ambulatory surgery operations, from the resumption of elective procedures. This will significantly offset the negatives being faced by UnitedHealthcare, its health benefits business.
Each sub-segment of Optum, UnitedHealth's health service business, is expected to continue delivering a solid performance, driving the overall segment's growth. Our estimate for 2023 operating income from the segment indicates an almost 11% year-over-year jump. Broadening of pharmacy care services and consistent strengthening of care delivery services will likely be the tailwinds for Optum's sub-segments.
UnitedHealth's financial strength enables it to navigate through tough times with ease. Its healthy balance sheet with cash and short-term investments of $46.5 billion at the first-quarter end was significantly higher than the short-term borrowings and current portion of long-term debt of $9.9 billion. Also, UNH's free cash flow after dividends in the trailing 12-month period soared 61% to $28 billion.
Its financial flexibility and operating strength allow it to boost shareholder values. Last month, UnitedHealth hiked its quarterly dividend by 14% to $1.88 per share, marking the 14th consecutive year of dividend hikes. It also has a well-established history of engaging in share repurchases. In the first quarter of 2023, the company rewarded its stakeholders with buybacks of $2 billion.
Rising Estimates
The Zacks Consensus Estimate for UnitedHealth's 2023 earnings is pegged at $24.86 per share, indicating a 12% year-over-year rise. The estimate remained stable over the past week. For 2024, the consensus mark suggests an 11.8% year-over-year jump. The company beat earnings estimates in all the last four quarters, with an average of 4%. The consensus estimate for 2023 revenues stands at $364.9 billion, suggesting 12.6% growth from a year ago.
Bottom Line
While UnitedHealth remains an appealing investment option for the long haul, thanks to its new deals, renewed agreements and expansion of service offerings and operations, short-term uncertainties persist. Washington's scrutiny of pharmacy benefit managers and concerns related to potential changes in Medicare and Medicaid are putting pressure on companies like UnitedHealth. Despite these near-term hiccups, UNH is worth holding onto. Those who haven't invested in the stock yet, could wait for a greater pullback and grab the stock at a better entry point.
UnitedHealth currently carries a Zacks Rank #3 (Hold).
Key Picks
Investors interested in the broader medical space may look at better-ranked players like HCA Healthcare, Inc. (HCA - Free Report) and Universal Health Services, Inc. (UHS - Free Report) , each carrying a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Headquartered in Nashville, TN, HCA Healthcare operates hospitals and related healthcare entities. The company's prudent acquisitions, rising admissions, diversified business and capital deployment are expected to drive long-term growth.
The Zacks Consensus Estimate for HCA Healthcare’s 2023 earnings is pegged at $18.10 per share, indicating a 7.2% improvement from the year-ago level. The consensus estimate for HCA’s revenues in 2023 suggests a 5.3% year-over-year rise.
King of Prussia, PA-based Universal Health Services operates acute care hospitals, behavioral health centers and other facilities through its subsidiaries. Consistent top-line growth, strong capital position, accretive acquisitions and a solid acute care platform are key positives for the company.
The Zacks Consensus Estimate for Universal Health Services’ 2023 earnings is pegged at $10.27 per share, signaling 4% year-over-year growth. The consensus estimate for UHS’ revenues in 2023 is pegged at $14.1 billion, indicating a 5.4% increase from the year-ago level.