Why This Healthcare Stock is a Strong Buy Despite Headwinds

Key Points

• UnitedHealth Group had a solid quarter despite the impact of last year's cyber attack. 
• The full year's guidance was reiterated and sufficient to sustain the fortress balance sheet and capital return. 
• Analysts' conviction is high for the consensus moderate buy rating and $580 price target, suitable for a 12% gain. 

UnitedHealth Group NYSE: UNH has headwinds, but its healthcare business and operational quality offset them, setting the stock to hit new all-time highs. The primary culprit is the recent cyber attacks, which shut down a significant portion of its network and cost more than previously estimated. The takeaway from the Q2 report is that the underlying business has momentum, and results exceed expectations and offset the damage. Eventually, the impact of the attacks will dissipate, and the company will be left in a stronger position, capable of investing in new growth opportunities while repurchasing shares and sustaining the robust distribution growth trend. 

UnitedHealth Group's Strong Quarter

The cyber attacks profoundly impacted the Q2 results, but far less than what could have come. The $98.9 billion in revenue is as expected despite the damage and up 6.4% compared to last year. Strength was seen in operating segments and most sub-segments, led by a 10.5% increase at Optum. 

The core UnitedHealth segment grew by 5.4%, driven by an 8.4% increase in commercial clients and a smaller increase in elderly and special needs clients. Within Optum, Optum Health and Optum RX grew by 13%, offset by a decline in the Optum Insights business impacted by the cyber attack. The notable detail is that the Optum Insights backlog continues to grow due to new health system partnerships. 

Margin news is also favorable. The company logged a 190-basis-point increase in the medical cost ratio, offset by a 160-basis-point improvement in operating costs. The net result is a decline in GAAP earnings compared to last year, but one-offs, including direct response to the cyber attack, impact the numbers. The adjusted earnings, including direct response costs of nearly $1.00, came in at $6.80 to beat consensus by more than 100 bps. The salient point is that GAAP earnings guidance was moderated but adjusted was not. The company reiterated its full-year adjusted earnings guidance, which has a mid-point above consensus and is sufficient to sustain the balance sheet and capital return outlook. 

UnitedHealth Group Grows Value While Navigating Difficult Times

Cash flow, earnings, and financial health are critical factors in the UnitedHealth Group stock price outlook. The company faced significant headwinds but still produced a cash-flow positive quarter while paying dividends and repurchasing shares. The share repurchases have slowed while the company focuses on mitigating the impact of cyber attacks, but the average count was still reduced by 1.3% in the quarter and 1.4% YTD. Dividends amount to $8.40 annually, or about 30% of the earnings, a low ratio. In this light, the company should sustain the double-digit distribution CAGR for at least another few years. 

The balance sheet is a fortress, so there are no red flags here. Highlights at the end of the quarter include a cash build, increased receivables, increased “other,” and increased total assets. The balance sheet gains offset the increased liabilities, resulting in a small increase in equity: leverage remains very low at roughly 2x cash and 0.7x equity. 

Sell-Side Support for UnitedHealth Group is Strong

Although analysts' sentiment in UNH stock dipped over the last year, they are highly convinced of the Moderate Buy rating and $580 price target. Twenty analysts are tracked by MarketBeat, most upgrading or increasing their price targets over the last 90 days. The consensus implies about 12% upside, sufficient for a new all-time high, while many fresh targets lead to the range's high end. 

Likewise, institutional activity has been mixed over the last 12 months. Still, there is a high conviction in the 90% institutional interest, and the group was buying in Q2, which aligned with the market bottom. Shares of UNH are up more than 2% in early trading and are tracking toward a one-year high.