UnitedHealth: Q2 2024 Earnings Review, A Panacea For Investor’s Fears

Summary:

• UnitedHealth Group Incorporated released its Q2 2024 earnings earlier today. The stock is up >5% in early trading.
• Revenues came in at $98.9bn, up ~$6bn YOY, while earnings from operations were $7.9bn on a GAAP basis, and net margin stood at 4.3%.
• Cyberattack impact, the South American operations’ sale, and Medicare Advantage business performance were all analyzed on the earnings call with analysts.
• The outlook on all three is positive in management’s eyes, with no further disruptions to earnings expected after 2024.
• This appears to have been a very solid set of earnings, with many of Wall Street’s worst fears about the business allayed. There appears to be a relatively strong bull case to be made for UnitedHealth, even as its major health insurer rivals suffer.

Investment Overview

UnitedHealth Group (NYSE:UNH), the $500bn market cap healthcare monolith, announced its Q2 2024 earnings earlier today, and in early trading, its share price is up >5%, reaching a value of >$540, just shy of its highest ever value of ~$550, achieved at the end of 2023.

First, let’s take a look at the headline figures.

Revenues came in just shy of $100bn for the quarter, at $98.9bn on a GAAP basis, up almost $6bn, or ~6.5%, year-on-year. Earnings from operations were reported as $7.9bn on a GAAP basis, down from $8.1bn in Q2 2023, and net margin retreated from 6%, to 4.3%. On an adjusted basis, however, earnings from operations were reported as $8.7bn, up from $8.1bn in the prior year period, with a net margin of 6% a 100 basis point improvement year-on-year.

Management ascribed the revenue growth to “strong expansion in people served domestically at Optum and UnitedHealthcare”. As a reminder, UnitedHealth consists of UnitedHealthcare, its health insurance plan business, and its Optum divisions, Optum RX, Optum Insight, and Optum Health, which are focused on optimizing overall healthcare performance using data analytics, population health, and pharmacy care services.

On a negative note, the cyberattack on UnitedHealth’s Change Healthcare claims clearinghouses business cost the business $1.1bn, and within the insurance business, the medical care ratio (essentially, healthcare expenses divided by premiums received) rose to 85.1%, versus 83.2% in the prior year period.

Management put this down to “accommodations to support care providers (40 basis points) and South American actions (25 basis points),” also noting that changes to the rates paid by the Centers for Medicaid and Medicare Services (“CMS”) for administering Medicare Advantage healthcare plans negatively affected the figure.

Cash flows from operations were $6.7bn, or 1.5x net income, and in June, the company raised its dividend by 12%, representing “the 15th consecutive year of double-digit increases.”

Finally, guidance for 2024 net earnings was updated to $15.95 — $16.4, and adjusted earnings to $27.5 — $28 per share, which reflects forward price to earnings ratios of respectively 34x, and 20x — solid, if unspectacular metrics, consistent with a company of United’s size.

Analysis: Three Themes Dominate Earnings — Change Healthcare, South America, Medicare Advantage

Predictably, UnitedHealth’s primary focus on its earnings call with analysts related to the fallout from the Change Healthcare cyberattack, the sale of the company’s South America operations, and the impact of the CMS rate changes on its Medicare Advantage business.

UnitedHealth paid a ransom to the cyberattackers that disrupted the Change business, which processes ~15bn healthcare claims each year, it’s estimated. The attack was apparently caused by UnitedHealth’s not using multifactor authentication, despite it being an industry standard practice, leading to an estimated >30% of Americans having their healthcare data leaked to the dark web.

Speaking on the earnings call with analysts today, Chief Financial Officer John Rex told analysts that:

UnitedHealth Group has provided more than $9 billion in loans and advance payments to help providers mitigate the impact of the attack, all at no cost to them.

And also that:

Cyber impacts in the quarter totaled 92 cents per share, and we now estimate the full year impact will be $1.90 to $2.05 per share.

To some extent, this helps to explain a wide discrepancy between adjusted and non-adjusted performance and guidance, which can sometimes be interpreted as a red flag. However, the CFO stated that “our ambition continues to be to return to baseline performance in ’25 and to grow strongly from there.”

When the cyberattack occurred in February, UnitedHealth stock traded >$525 per share, but quickly retreated to a value of ~$440 by mid-April, a loss of >16%. The recovery of the share price was almost as rapid, however, with the stock reaching $525 per share once again in late May.

Some analysts suggested the impact of the attack on United’s business was minimal, with Change accounting for “~2% of earnings per share.” Any reputational damage suffered by the company appears to have been quickly restored, despite what seems to be a significant failure in oversight by the company. As a further fillip to investors, UnitedHealth said it would recommence share buyback programs after halting them in the aftermath of the attack.

In Q1 2024, UnitedHealth completed the sale of its “larger Brazilian operations,” and management’s plan is to exit the region completely. In its earnings press release, management states that:

Total South American impacts in the quarter were $1.28 per share, the majority of which is non-cash and is due to the cumulative impact of foreign currency losses.

Management also cited a figure of $1.3bn of “South American impacts”, but, like the Change attack (provided UnitedHealth has tightened its security and introduced “MFA”), these are “one-off” events that ought not to impact UnitedHealth’s long-term outlook, which, according to CEO Andrew Witty, is to target a “13-16% long-term growth target.

Based on adjusted earnings per share (“EPS”) guidance for 2024, UnitedHealth will fall just short of that target in 2024, and looking ahead, its Medicare Advantage business may well dictate whether such a figure is achievable or not.

Medicare Advantage: Growth Driver Or Busted Flush? It Looks Like The Former

While the South America and Change Healthcare issues look to be migrating from the present to the past, the same cannot yet be said of UnitedHealth’s Medicare Advantage business. It is arguably the key growth driver at the company and its most important business.

As I explained in a Q1 2024 earnings preview of UnitedHealth released in April, while, at the end of 2023, the company administered ~53m commercial healthcare plans, and ~7.7m Medicare Advantage (“MA”) plans, its “Medicare and Retirement” business drove ~$130bn of revenues, while “Employer and Individual” drove ~$76.5bn of revenues. As I wrote in that note:

Research shows that gross margins for MA plans are twice that of ordinary plans, while private plans cost the government – and, therefore, the taxpayer – on average 4% more than standard plans.

This has created both a massive opportunity for Medicare Advantage plan providers – and UnitedHealth in particular, given it is the largest provider of MA plans, with ~28% of a ~30m patient market – and a problem.

Initially, health insurers realized that MA plans were the most lucrative plans to administrate, and have adjusted their business models so that they are geared to extracting the maximum benefit from them – in short, the cheaper they can administer these plans on behalf of the Centers for Medicaid and Medicare Services, the more profit they could realize.

More recently, however, the CMS, which calculates rates of payment per plan based on the historic costs of administering healthcare in particular regions, and also offers bonus payments for plans rated four stars out of five or higher, has begun to realize it may have been overpaying its private insurer clients, and is attempting to claw back what is essentially taxpayer’s money.

The expectation, when the CMS announced rate increases of 3.7% per annum, was that it would subsequently revise them upwards, but it declined to do so, which was another significant contributor to UnitedHealth’s sudden losses in April.

Most health insurers with a large exposure to MA — besides UnitedHealth, which has the most members, Humana (HUM), and CVS Health (CVS) have the highest membership numbers — saw their share prices — and long-term growth guidance — significantly impacted by the CMS’s decision to rein in rate rises. Arguably, however, UnitedHealth, thanks to its size and scale, is the least affected.

The company added an additional 10k MA members during Q2, with 7.77m members reported. However, in prepared remarks, management did not attack the CMS, as the CEO’s of Humana and CVS have done in past earnings calls, choosing to focus on positives instead.

CEO Witty remarked that:

A recent study by Milliman found that the cost to taxpayers of Medicare Advantage is 4% less than traditional fee-for-service Medicare.

At the same time, Medicare Advantage provides seniors well over $2,000 per year in additional value through lower out-of-pocket costs and important services like dental, vision and hearing – none of which fee-for-service Medicare covers.

Last year, our medical professionals made more than 2.5 million home visits. As a direct result, our clinicians identified 300,000 seniors with emergent health needs that may otherwise have gone undiagnosed.

They connected more than 500,000 seniors to essential resources to help them with unaddressed needs such as food insecurity, medication affordability, transportation and financial support.

The bottom line: our home visit programs help patients live healthier lives … and save taxpayers money. It is only Medicare Advantage that makes programs and results like this possible.

Meanwhile, CFO Rex told analysts:

Our recently filed Medicare Advantage bids for ’25 again took a balanced approach to provide as much stability for seniors as possible, while factoring in the realities of the funding cuts and current care patterns.

In short, you could argue that UnitedHealth is quietly confident that it has the right strategy in place for MA, and expects to continue to profit from this business, and earn a respectable margin, without punishing taxpayers. The company reported no unexpected increases in medical care expenses for Q2 2024.

Unlike CVS Health, whose share price is down >25% year-to-date based on its failure to see the CMS’ rate rises coming, and adjust accordingly, UnitedHealth stock is +3% in 2024, and +13% on a 12-month basis. Despite being the biggest negotiator at the MA table, there appears to be no panic, only optimism for the path ahead.

Final Analysis: Post Q2 2024 Earnings, Is UnitedHealth Stock A “Buy”?

Wall Street certainly seems to have concluded that UnitedHealth stock is undervalued after today’s earnings update. This is primarily, I suspect, because there were no further unpleasant surprises in store in relation to the Change debacle, the sale of South American operations, and the positive / non-confrontational — coverage of the MA market.

The Change impact may have been a little more impactful to 2024 earnings than expected, but the market will not mind that so long as the fallout does not drag on into 2025, which management seems to have promised it will not.

The impact of the Inflation Reduction Act (“IRA”), meaning the government now has a seat at the table when it comes to drug pricing negotiations for the first time, does not seem to have affected performance at Optum. It saw revenues increase to $62.9bn, from $56.3bn in the prior year period, and operating margin improve, on an adjusted basis, to 6.8%.

UnitedHealthcare growth was also impressive, rising nearly $4bn to $74.1bn, with an operating margin of 5.9% on an adjusted basis.

UnitedHealth is not a wildly profitable business — few health insurers are, in fact, with net profit margins typically single digit, while in the “Big Pharma” industry, it is not unusual to see NPMs of >20%, or even >30%.

Nevertheless, you can make the argument that there is good growth potential here. This is not only in terms of the top and bottom lines — management seems to believe that both can grow in the double digits — but also in terms of the share price. In my view, all three are closely correlated.

UnitedHealth’s latest dividend increase provides a yield of 1.63% at the time of writing. , and with share buybacks back on the table, despite UnitedHealth stock racing to its highest ever value, there remains a reasonably solid “buy” opportunity in play, in my view.

UnitedHealth has unquestionably had to deal with some challenging issues across the past 12 months. By and large, however, it seems to have emerged unscathed, and is even thriving, with its debt also rated as “AA-” by Standard and Poor’s, who stated in November last year:

The stable outlook reflects our expectation that UNH will sustain an excellent competitive position with strong revenue and earnings growth in 2024-2025

It’s difficult to disagree. With Wall Street now beginning to bet on a Republican administration being at the helm in 2025, a scenario that traditionally favors the health care industry, any investor looking for a solid blue-chip stock to buy and hold for a few years likely ought to be considering UnitedHealth.

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Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in UNH over 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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