Why Dip in UnitedHealth Stock Post Q2 is a Good Entry Point

UnitedHealth Group Inc. UNH maintained its trend of surpassing estimates once again, with second-quarter earnings beating by 3.63%.

The healthcare major posted a top and bottom-line growth of 12% and 28% year over year, respectively.  UnitedHealth also raised its 2018 earnings guidance for the third time.

Despite the apparently strong results, the stock of the company lost 2.6% in the day’s trading and affected other players along with it.

Barring the day’s dip, the stock has gained 17% so far this year compared with the industry’s gain of 15%.

What Caused the Dip?

One of the reasons for the share decline was the miss in the company’s medical loss ratio (MLR), which measures the portion of premium paid to cover patients’ health care cost. UnitedHealth reported an MLR of 81.9% while analysts had estimated 81.8%. Though the miss was only by 10 basis points, it caught analysts’ and investors’ caution.  

Per David Windley, a Jefferies analyst, the miss in MLR “invites scrutiny.”
A 3.6% decline in membership in the company’s core business of the fee-based Commercial Group also irked investors.

Moreover, the company’s guidance raise for 2018 was seen as less aggressive. Against the backdrop of tailwinds from the recent mergers and acquisitions and pretty solid operating trends so far, the guidance  could have been better.

During the earnings conference management stated, “Despite strong top-line growth and results, we are not performing at, nor consistently growing to, our full potential. This has, and will continue to be, an area of intense focus for our business leaders.” This might have weighed on the stock.

UnitedHealth is considered a bellwether of the industry and its results hold a mirror for the performance of the other stocks in the industry. Concern over UnitedHealth’s results extended to affect shares of Humana Inc. HUM, Anthem  Inc. ANTM and WellCare Health Plans, Inc. WCG which lost 0.58%, 0.87% and 0.62%, respectively, on the same trading day.  

Bright Long-Term Growth Picture

These hiccups should be short lived. The health insurer major is perfectly poised for long-term growth on the back of its vast diversified operations, investments in technology, acquisitions and a very strong balance sheet. The reimbursement increase for Medicare Advantage for 2019 bodes well for the company’s MA business, a line in which it is a market leader.

UnitedHealth’s continued focus on transforming pharmacy services, progress on consumer-centric benefits, and utilization of digital tools should drive growth. The company’s plans of expanding its international business should further diversify its revenues.

UnitedHealth carries a Zacks Rank #2 (Buy). The stock carries an impressive Value Score of A. Our research shows that stocks with a Value Style Score of A or B when combined with a Zacks Rank #1 or 2 offer the best opportunities in the value investing space. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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