UnitedHealth Group: A Solid Q2 And Impressive Momentum Move

Summary:

• UnitedHealth Group has been a top performer in the S&P 500 recently, with strong Q2 results driving momentum.
• UNH remains in a healthy position compared to peers, with potential upside in earnings and dividends forecasted through 2026 despite election-year risks.
• I highlight key price levels to watch following a key breakout.

UnitedHealth Group (NYSE:UNH) has been among the leading stocks in the S&P 500 over the past four weeks. Following the market’s peak on July 16, the SPX is lower by 8% and just a trio of sectors are green. Among them is the Health Care space.

Helping the group was a solid Q2 report from UNH, but there’s a broader rotation away from once-high-flying tech stocks and momentum plays into blue-chip stalwarts. Higher volatility has resulted in low-beta sectors outperforming. If the correction continues, as it did about this time last year, then we should expect the possibility of further alpha in Health Care.

I reiterate a buy on UNH. While I see shares just slightly above fair value, its technical situation is robust. Earnings execution is also strong, which should help support bullish headlines around this dividend grower.

Defensive Sectors Positive Following the S&P 500’s Mid-July Peak

According to Bank of America Global Research, UNH is one of the largest Managed Care Organizations (MCOs), serving members both in the US and internationally. UNH is the most diversified payer, either by product line, geography, or customer type. The company’s operating segments include United Healthcare, OptumRx, OptumInsight, and OptumHealth.

Back in July, UNH reported a solid set of quarterly results. Q2 non-GAAP EPS of $6.80, topping the Wall Street consensus estimate of $6.63 while revenue of $99 billion, up more than 6% from year-ago levels, was in line with expectations. Along with the bottom-line beat, the management team updated its FY 2024 net earnings outlook to $15.95 to $16.40 per share, while adjusted net earnings are now seen in the $27.50 to $28.00 per share range.

The strong EPS beat came amid some challenges during the quarter. There were costs associated with exiting its South America presence and a cyberattack, but investors were willing to look beyond those items – UNH rose 6.5% in the session that followed, making it the best post-earnings move going back more than three years. It was also yet another earnings beat – the firm hasn’t missed on the bottom line since at least 2019, according to Seeking Alpha’s dataset.

Fundamentally key for the largest Dow component is its Medical Loss Ratio (MLR). It came in higher than expected, but it wasn’t an all-out poor figure. There was a 40-basis-point hit from previous authorizations and another quarter-point drop due to the exit from South America, so those were generally seen as transitory items, and likely why we didn’t see a negative impact on the stock price. Back those out, and the MLR would have been closer to consensus estimates.

UNH remains in a healthy position compared to its peers who are also cutting benefits. That presents an upside potential given that the $521 billion market cap company may be able to raise prices in 2025. Downside risks include healthcare utilization rates that verify higher than expected and weakness from its Optum unit. Right now, uncertainty surrounding the election and the possibility of negative regulatory changes could cast a negative cloud over UNH in the quarters ahead.

On the earnings outlook, analysts at BofA see operating EPS coming in just shy of $28 this year, with solid growth in the low double digits through 2026. The current Seeking Alpha consensus numbers show a similar profit path, while UNH’s top line climbs at an impressive and steady pace between 7% and 8%.

Dividends, meanwhile, are forecast to rise by more than 10% annually now through the out year and 2026, though its yield may stay under 2% for much of that time. On a trailing 12-month basis, its free cash flow yield is light, around 1%.

UnitedHealth Group: Earnings, Valuation, Dividend Yield Forecasts

Given a nearly 30% rise in the stock price off the April low, the company’s valuation is of course a concern. But with high and relatively safe earnings growth ongoing, I assert that a valuation premium is very much deserved.

If we assume normalized EPS of $29.50 in the next 12 months and apply the stock’s 5-year average 20.3 price-to-earnings ratio, then shares should trade near $599, making it slightly undervalued today, but not a screaming buy. It’s possible that a higher P/E is warranted given UNH’s defensive nature, so I see some upside to that valuation.

UNH: Robust EPS Growth Ahead, A 20x Multiple Puts the Valuation Near $600

Compared to its peers, UNH features a mixed valuation rating, but the GAAP figures likely weigh on the overall valuation mosaic (which included unusual items mentioned previously). The firm’s growth grade is not all that impressive, but the forward outlook is much more sanguine, while current profitability trends are very impressive.

What’s more, the sell-side has turned more bullish on UNH, evidenced by a high 12 EPS upgrades in the past 90 days compared with just 7 downgrades. Finally, share-price momentum is healthy today, and I see technical upside to come.

Competitor Analysis

Looking ahead, corporate event data provided by Wall Street Horizon show an unconfirmed Q3 2024 earnings date of Friday, October 11 BMO. Before that, shares trade ex a $2.10 dividend on Monday, September 16. No other volatility catalysts are seen on the calendar.

Corporate Event Risk Calendar

The Technical Take

With the stock just modestly undervalued today but with some defensive characteristics, I see a solid chart. Notice in the graph below that UNH broke out above key long-term resistance in the $550 to $560 range. I noted that zone in my previous analysis six months ago, highlighting that it was an area of selling until the bulls took the stock above it. Well, the upside breakout took place following the solid Q2 report. Shares reached a high of $591 earlier this month, and are now checking back to test the important support point.

Also take a look at the long-term 200-day moving average – it’s now trending higher, another sign that bulls control the primary trend. The shorter-term 50dma has crossed above the 200dma in a bullish golden cross pattern, too. Furthermore, with a high amount of volume by price under $550, even if we see a protracted pullback off the recent all-time high, there is plenty of potential demand for shares down to the high $400s. Lastly, the RSI momentum oscillator at the top of the chart confirms the uptrend in price via a series of higher highs and higher lows.

Support is near $550 while an upside target is based on the $110 height of the previous range, added on top of the breakout point, which is about $665.

UNH: Bullish Upside Breakout Targets $665

The Bottom Line

I have a buy rating on UNH. The stock’s valuation is not indicative of a deep value play, but strong EPS growth and a healthy chart are favorable factors in the face of election-year uncertainty.

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Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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