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UnitedHealth Group (NYSE: UNH) is scheduled to report its Q2 2024 results on Tuesday, July 16. We expect UnitedHealth to post revenue of $99 billion and earnings of $6.75 on a per-share and adjusted basis, slightly above the street expectations. The company will likely continue to benefit from the increased contribution of the Optum Health business, while its health insurance business should benefit from increased memberships. Medical costs will continue to remain in focus, with the metric expected to rise y-o-y. Not only do we expect UnitedHealth to post upbeat results in Q2, we believe there is some room for its stock to grow from its current levels of under $510. Our interactive dashboard analysis of UnitedHealth’s Earnings Preview has more details on how the company’s revenues and earnings will likely trend for the quarter. So, what are some of the trends that are likely to drive UnitedHealth’s results?

Firstly, let us look at UNH stock performance in recent years. UNH stock has seen gains of 45% from levels of $350 in early January 2021 to around $505 now, vs. an increase of about 50% for the S&P 500 over this roughly three-year period. However, the increase in UNH stock has been far from consistent. Returns for the stock were 43% in 2021, 6% in 2022, and -1% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that UNH underperformed the S&P in 2023.

In fact, consistently beating the S&P 500, in good times and bad — has been difficult over recent years for individual stocks; for other heavyweights in the Health Care sector including JNJ and MRK, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could UNH face a similar situation as it did in 2023 and underperform the S&P over the next 12 months – or will it see a strong jump? From a valuation perspective, we think UNH stock is likely to see higher levels. We estimate UnitedHealth’s Valuation to be $586 per share, reflecting over 15% upside from its current levels of $505. Our forecast is based on a 21x P/E multiple for UNH and expected earnings of $27.70 on a per-share and adjusted basis for the full year 2024. The 21x figure aligns with the stock’s average P/E ratio over the last three years.

Looking at the previous quarter, UnitedHealth Group’s revenue of $99.8 billion reflected a 9% y-o-y growth driven by a 7% rise in UnitedHealthcare and a 13% jump in Optum segment sales. The company saw its operating margin decline by 85 bps y-o-y to 8%. While the UnitedHealthcare segment operating margin contracted by 40 bps, Optum segment margins contracted by 110 bps due to the business disruption impact at Change Healthcare.

UnitedHealth recorded a $7 billion charge related to the sale of its Brazil business, including the impact of currency translation losses. The company recorded a $0.74 per share impact (on a reported basis) from the cyber attack in Q1. However, the amount for the full-year is expected to be in the range of $1.15 and $1.35 per share. These factors, clubbed with a 2% decline in total shares outstanding, led to a 10% y-o-y rise in the bottom line to $6.91 on a per-share and adjusted basis.

Coming to the latest quarter, UnitedHealth should continue to benefit from an increase in total customers served for its insurance offerings as well as the Optum segment. However, there has been an increase in elective surgeries, resulting in higher medical costs for insurance companies. This trend is expected to continue in the near term. We estimate the medical care ratio to rise to levels of over 84% in Q2’24, versus 83.2% in the prior-year quarter. While the company faces near-term headwinds, primarily from rising medical costs, we think it’s already priced in, with UNH stock seeing a 4% fall year-to-date, versus a 17% rise in the broader S&P500 index.

While UNH stock looks like it can see higher levels, it is helpful to see how UnitedHealth Group Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 7/12/2024
[2] Cumulative total returns since the end of 2016

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.