UnitedHealth Pre-Q3 Earnings: Golden Opportunity or Fool's Gold?

UnitedHealth Group Incorporated UNH is set to report third-quarter 2024 results on Oct. 15, 2024, before the opening bell. The Zacks Consensus Estimate for the to-be-reported quarter's earnings is currently pegged at $7.02 per share on revenues of $99.6 billion. Growing premiums, commercial memberships and Optum business are expected to have supported its performance, partially affected by elevated expenses and lower Medicaid memberships.

The third-quarter earnings estimate has witnessed downward revisions over the past 60 days. However, the bottom-line projection indicates a year-over-year increase of 7%. The Zacks Consensus Estimate for quarterly revenues suggests year-over-year growth of 7.8%.

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UnitedHealth has a robust history of surpassing earnings estimates, beating the consensus estimate in each of the last four quarters, with the average surprise being 3.3%.

Q3 Earnings Whispers for UNH

However, our proven model does not conclusively predict an earnings beat for the company this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy), or 3 (Hold) increases the odds of an earnings beat. That's not the case here.

UNH has an Earnings ESP of 0.00% and a Zacks Rank #4 (Sell).

What's Shaping Q3 Results?

UnitedHealth's third-quarter earnings are expected to have benefited from higher premiums, driven by the expansion of its commercial membership base. The Zacks Consensus Estimate for premium revenues for the third quarter indicates 6.1% year-over-year growth, whereas our model estimate suggests a 5.3% increase. Increased contributions from both Optum Health and its health benefits divisions are expected to have supported premium growth.

UNH's third-quarter top-line performance is expected to have been enhanced by a rise in service revenues in Optum Health and OptumRX. The consensus estimate implies an almost 6% jump in service revenues. Similarly, we expect product revenues to have seen more than 18% year-over-year growth, while the Zacks Consensus Estimate indicates a nearly 18% increase.

A rise in the number of people being catered to in value-based care arrangements, enhanced technology-enabled offerings, and growth in its specialty and community-based pharmacy offerings are likely major tailwinds for the company's results. The Zacks Consensus Estimate for operating income from the Optum business segment suggests a 15.8% year-over-year increase. These are expected to have positioned the company for year-over-year growth in the third quarter.

However, Optum survived a blow from a cyber-attack on its Change Healthcare business in the first quarter. The company expects to incur direct response costs in the range of $1.30-$1.35 per share for 2024, along with a business disruption impact of 60-70 cents. These factors are expected to have partially affected its profit growth levels in the third quarter.

Now let's focus on memberships in selected programs. The Zacks Consensus Estimate for UnitedHealthcare's total domestic commercial customers suggests 7.7% year-over-year growth. The consensus mark for Medicare Advantage members indicates a 3.2% year-over-year rise, whereas our estimate implies a 4.5% gain.

However, the consensus estimate for Medicaid memberships implies a 7.1% decline from the year-ago level, while our model estimate suggests a 7.6% slip. Also, the consensus mark for international memberships indicates a nearly 73% year-over-year plunge. This is likely to have pulled total memberships down from the year-ago period. Both the consensus estimate and our model estimate imply a 4.8% fall year over year.

Rising medical costs, as seniors continued resuming elective proceduresare expected to have elevated UnitedHealth's overall expenses in the quarter. The expected growth in healthcare utilization, especially in the Medicare Advantage space, might have affected margins. We expect higher costs of products sold to have further reduced its margins. Our model estimate for total operating costs indicates an 8% increase from the prior-year period.

The Zacks Consensus Estimate for UNH's medical care ratio is pegged at 84.31%, up from 82.30% in the year-ago quarter. Our estimates for medical costs and costs of products soldindicate 7.9% and 20.8% year-over-year increases, respectively. The Zacks Consensus Estimate for operating income from UnitedHealthcare indicates a nearly 5% year-over-year decline, making an earnings beat uncertain this time around.

Price Performance & Valuation

UnitedHealth's stock has gained 10.5% year to date, outperforming the industry's growth of 5.2%. Some of its peers like Humana Inc. HUM and Molina Healthcare, Inc. MOH have plunged 46.9% and 10.1%, respectively, during this time. All these stocks have lagged the S&P 500 significantly, which has rallied 19.5% during the same period.

YTD Price Performance

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Now, let's look at the value UnitedHealth offers investors at current levels.

The company's valuation looks somewhat stretched compared with the industry average. Currently, UNH is trading at 19.13X forward 12 months earnings, above its five-year median of 19.08X and the industry's average of 16.22X.

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Assessing UnitedHealth's Prospects

UnitedHealth's diversified portfolio and strategic growth initiatives in home healthcare, commercialbusiness and AI-driven analytics offer promising long-term growth prospects. Its estimated earnings growth rate of 13% for the next five years compares favorably with the industry average of 10.6%. The company continues to reward shareholders with substantial dividends and share repurchases, underpinned by strong cash flow and operational resilience.

However, challenges such as the impacts of the recent cyber-attack, regulatory investigations, margin pressures due to lower-than-expected Medicare rates and rising medical costs could limit short-term stock performance. Declining membership in the global business and higher medical care ratio can be causes of concern. Investors should closely monitor these factors.

Final Words

While UNH's long-term outlook remains promising, it might not be the right time to buy just yet. Investors should stay patient and wait for a better entry point, as rushing in now could limit potential gains. Current shareholders may want to consider locking in profits, given that the stock appears overvalued and has minimal room for further growth in the short term.

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