UnitedHealth Earnings Top; UNH Stock Flashes Buy Signals


UnitedHealth Group kicked off third-quarter reporting season for the managed care group by topping Wall Street estimates early Thursday, despite fallout from Covid's delta wave. UnitedHealth nudged up full-year earnings guidance. UNH stock surged higher in Thursday's stock market action, leading a Dow Jones rally.

Medical costs as a percentage of premiums rose to 83% from 81.9% in the year-ago quarter, but UnitedHealth said the rise in its medical care ratio was due largely to the repeal of the health insurance tax.

Direct Covid care and testing costs ran above expectations in Q3, with about 60,000 hospitalizations. Yet "we again saw elective care offsetting the impacts of higher case rates," CFO John Rex said on the earnings call, meaning insured members deferred nonemergency procedures.

UnitedHealth Earnings

Estimates: Analysts expected UnitedHealth earnings of $4.41 a share, up 26% vs. a year earlier. Revenue was seen rising nearly 10% to $71.55 billion, according to Zacks Investment Research.

Results: UnitedHealth adjusted earnings per share rose 29% to $4.52 Revenue climbed 11% to $72.34 billion. Both its UnitedHealthcare managed care division and its Optum health services division saw double-digit growth.

Medicare Advantage customers rose 70,000 from Q2 to a total of 6.455 million. Medicaid members rose 380,000 to 7.510 million.  Commercial insurance members served by UnitedHealth rose 320,000 to 26.555 million.

Outlook: UnitedHealth raised its full-year adjusted EPS guidance to a range of $18.60-$18.90 from $18.30 to $18.80. Ahead of the Q3 UnitedHealth earnings report, analysts projected full-year EPS of $18.74.

Previous guidance built in a Covid hit of $1.80 per share. UnitedHealth offered a vague update on that impact, saying that the outlook for Covid's earnings impact "is consistent with previous expectations."

Over the longer term, UnitedHealth re-upped its guidance of 13%-16% annual EPS growth.

UNH Stock

UNH stock climbed 4.2% to 420.36  following UnitedHealth's earnings beat and analyst call. With its opening surge, UNH stock gapped above its 50-day average. In the opening minutes of trade, UNH stock briefly edged above a 431.46 buy point from an eight-week flat base, according to MarketSmith. The retreat off highs wasn't especially encouraging. But the move above its 50-day line offers an early entry.

UNH stock had been broadly underperforming the S&P 500 since early May, after going on a run following the Q1 UnitedHealth earnings report. However, Thursday's action broke the downtrend in UNH stock's relative strength line, the blue line in the charts provided.

As of Wednesday's close, the Medical-Managed Care group ranked a weak No. 149 of 197 industry groups based on stock performance and momentum.

UnitedHealth-Change Healthcare Deal

In the earnings call, UnitedHealth President Dirk McMahon may have provided something of a surprise about its pending acquisition of  Change Healthcare.

"We continue to work diligently to satisfy regulatory requests and now believe, based on our experience so far, the transaction should close in the first part of 2022."

The Department of Justice has initiated an extensive antitrust probe over the impact of the deal on the healthcare IT services market. The American Hospital Association has told the Department of Justice that it believes the deal cannot be fixed, even with massive divestitures.

Change Healthcare didn't get much of a boost from the news, rising 0.6% to 20.60. That gives Change a market value of about $6.4 billion, still far below the $7.8 billion in cash offered by UnitedHealth, on top of assuming $5 billion in debt.

Regulatory Risk

UnitedHealth's earnings report comes as regulatory uncertainty is at a near-term peak and probably won't recede until it's clear what Democrats will include in their social-spending reconciliation package. The Democrats can't spare any votes in the Senate in passing their reconciliation package, which is now expected to cost around $2 trillion, far below earlier proposals. The effective veto for moderate senators will make it hard to pass politically controversial measures. However, a couple of significant health care changes are still in play.

The proposal to give Medicare power to negotiate drug prices could pinch profits for more than just drugmakers. Prescription benefit manager OptumRx would likely feel some impact.

Another proposed Medicare change would extend dental, hearing and vision benefits to traditional Medicare. Those extra benefits go a long way to explaining Medicare Advantage's popularity and huge growth. Making them part of the default package might dilute growth of Medicare Advantage, where UnitedHealth has carved out a leading position.

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