Company Reports

On an adjusted basis, narrow-moat UnitedHealth turned in stronger first-quarter results than expected, offsetting the anticipated Change business disruption effects for 2024, as management maintained its adjusted earnings per share outlook for the year. Industry investors may be pleased to see that medical utilization is trending toward the firm's expectations, too. We are maintaining our $520 fair value estimate, which remains moderately above recent trades.

In an unusual development, the Centers for Medicare & Medicaid Services released its final Medicare Advantage, or MA, rate notice that matched its initial rate notice, instead of rising. In this final rate notice, the overall increase in MA revenue to insurers remained lower than the risk score trend, which is likely to pressure MA benefits, pricing, and/or insurer profits in 2025. We are reducing our fair value estimate on Humana by 5% on this disappointing development, given its focus on MA and our expectation that its previous profit goal in 2025 and potential growth in subsequent years may be constrained. However, we are not changing our fair value estimates on the other more diverse managed care organizations, or MCOs, that we cover, and market price declines on this news may create more attractive investment opportunities for investors with a long-term investment horizon. Currently, Humana, CVS, and Centene remain the most attractive MCOs on a price/fair value basis.

Regulators are investigating narrow-moat UnitedHealth on antitrust concerns, according to media reports. Specifically, regulators appear concerned about the combination of UnitedHealth's insurance and caregiving assets. Given the uncertainty surrounding this investigation, we are not changing our $520 fair value estimate on UnitedHealth currently, but investors should know that this investigation may have significant ramifications for UnitedHealth and even the broad industry, if regulators find wrongdoing.

Narrow-moat UnitedHealth turned in mildly stronger fourth-quarter results than expected, highlighting the benefits of its diversified business model even as medical utilization rose. However, those fourth-quarter results were not enough to change our recently raised $520 fair value estimate, especially since the firm maintained its 2024 guidance. Shares dropped toward fair value in early trading on the medical utilization concerns.

Narrow-moat UnitedHealth revealed a solid 2024 and long-term outlooks at its annual investor day. Considering cash flows generated by the firm since our last valuation change about a year ago and mildly higher cash flow prospects as its higher-margin, noninsurance business continue to grow at a fast clip, we have raised our fair value estimate on UnitedHealth by a low-double-digit percentage to $520 per share. After this change, shares look about reasonably valued on an absolute basis but still relatively rich compared with many of its managed-care peers when considering their similar growth prospects.

Under one roof, UnitedHealth combines a top-tier health insurer (UnitedHealthcare), pharmacy benefit manager (Optum Rx), provider (Optum Health), and health analytics franchise (Optum Insight). The company's integrated strategy has resulted in some of the best returns in the industry in recent years and has been copied at least in part by the late 2018 mergers at CVS Health, which added Aetna's medical insurance assets to its existing retail stores and market-leading PBM, and Cigna, which added Express Scripts' PBM assets to its existing medical insurance operations. Outside of substantial regulator-led reforms, we think these vertically integrated organizations could help bend the healthcare cost curve in the United States, and UnitedHealth should be one of the key leaders of that charge.

In advance of the Medicare open enrollment period that starts on Oct. 15, the Centers for Medicare & Medicaid Services, or CMS, released its star ratings that measure the performance of the Medicare Advantage, or MA, plans offered by private insurers. At first glance, we do not anticipate changing our fair value estimates for any managed-care organization, or MCO, based on this new data. However, even as overall MA star ratings largely stabilized after a big drop last year, there were some clear winners and losers in this year's scoring that could affect market sentiment for MCO shares.

Narrow-moat UnitedHealth turned in a strong third quarter, and management slightly increased the bottom-end of its 2023 adjusted EPS guidance range based these trends. Our 2023 expectation remains at the top of that new range, and we do not currently intend to change our $462 fair value estimate. Shares look a little rich to us, especially compared with managed care peers that have similar growth prospects.

Near-term uncertainty is creating an opportunity for long-term investors in the managed-care organization segment. Of the six narrow-moat MCO stocks that we cover—Centene, Cigna, CVS Health, Elevance, Humana, and UnitedHealth—five are trading in undervalued territory, and even the typically premium-priced UnitedHealth looks reasonably valued to us.

Under one roof, UnitedHealth combines a top-tier health insurer (UnitedHealthcare), pharmacy benefit manager (Optum Rx), provider (Optum Health), and health analytics franchise (Optum Insight). The company's integrated strategy has resulted in some of the best returns in the industry in recent years and has been copied at least in part by the late 2018 mergers at CVS Health, which added Aetna's medical insurance assets to its existing retail stores and market-leading PBM, and Cigna, which added Express Scripts' PBM assets to its existing medical insurance operations. Outside of substantial regulator-led reforms, we think these vertically integrated organizations could help bend the healthcare cost curve in the United States, and UnitedHealth should be one of the key leaders of that charge.

Blue Shield of California announced that it was dropping CVS Health for its nonspecialty pharmacy benefit management services in favor of a coalition of providers, including Amazon and the Mark Cuban Cost Plus Drug Company. While these organizations have been making noise as potential PBM entrants for a while, this contract win looks like the first one with any real teeth, in our opinion, and could signal the start of a change in the PBM competitive landscape, particularly for top-tier players CVS, Cigna, and UnitedHealth. We do not expect to change our narrow moat ratings on these MCOs because of this announcement, though.

UnitedHealth turned in a strong second quarter, and management slightly increased its 2023 outlook on these trends, despite increasing medical utilization, especially among seniors. At first glance, we do not intend to change our $462 fair value estimate, and shares appear about fairly valued. Our narrow economic moat rating also continues to recognize the long-term regulatory risks faced by UnitedHealth and its managed care peers.

At an investor conference, narrow-moat UnitedHealth made comments about surging demand for healthcare services in the second quarter that pushed down shares by a mid-single-digit percentage in after-hours trading, or even closer to our $462 fair value estimate. Management did not change its 2023 guidance though, and we suspect its Optum Health business may even benefit from increasing medical utilization, even as the medical insurance business feels pressure.

UnitedHealth turned in a strong start to the year, and management raised its guidance slightly for the full year on these strong trends. The new guidance range remains below our 2023 view, though, and we do not intend to change our $462 fair value estimate at first glance. Our economic moat rating also remains narrow and recognizes the long-term regulatory risks the company faces, primarily in medical insurance and pharmacy benefit management.

Under one roof, UnitedHealth combines a top-tier health insurer (UnitedHealthcare), pharmacy benefit manager (Optum Rx), provider (Optum Health), and health analytics franchise (Optum Insight). The company's integrated strategy has resulted in some of the best returns in the industry in recent years and has been copied at least in part by the late 2018 mergers at CVS Health (added Aetna's medical insurance assets to its existing retail stores and market-leading PBM) and Cigna (added Express Scripts PBM assets to its existing medical insurance operations). Outside of substantial regulator-led reforms, we think these vertically integrated organizations could help bend the healthcare cost curve in the United States, and UnitedHealth should be one of the key leaders of that charge.

UnitedHealth's strong results continued in the fourth quarter, and for the full year, the company exceeded our expectations on a free cash flow basis while coming in about as we expected in other key metrics. On this robust cash flow generation, we plan to raise our fair value estimate by the midsingle digits on a percentage basis. After our fair value estimate change, UnitedHealth shares will probably remain slightly overvalued. Our economic moat rating, which remains narrow, recognizes the long-term policy risks the company faces primarily in medical insurance and pharmacy benefit management, although the shares appear to be benefiting from a particularly benign period of policy risk currently.

At its annual investor meeting, UnitedHealth maintained its 2022 guidance and gave its initial outlook for 2023, both of which are still slightly below our expectations. While we may tinker with our near-term assumptions a bit based on the company's investor day announcements, our $426 fair value estimate will likely not change materially. The company's narrow-moat rating appears intact as well, which is a similar view that we have for all of the managed care companies we cover. Although these companies appear to be benefiting from a benign period of policy risk, currently, our narrow moat ratings reflect the long-term policy risks that could eventually emerge, particularly in medical insurance and pharmacy benefit management.

UnitedHealth's strong results continued in the third quarter, and we are increasing our full-year expectations mildly, given recent trends. Considering that mild change and cash flows generated since our last valuation change in April, we are raising our fair value estimate by a mid-single-digit percentage. However, we continue to view UnitedHealth's shares as moderately overvalued relative to key peers, given the latter's similar profit growth prospects but lower trading multiples. Like its peers, UnitedHealth's economic moat rating remains narrow, which recognizes the long-term policy risks it faces primarily in medical insurance and pharmacy benefit management, although the shares appear to be benefiting from a particularly benign period of policy risk, currently.

Under one roof, UnitedHealth combines a top-tier health insurer (UnitedHealthcare), pharmacy benefit manager (Optum Rx), provider (Optum Health), and health analytics franchise (Optum Insight). The company's integrated strategy has resulted in some of the best returns in the industry in recent years and has been copied at least in part by the late 2018 mergers at CVS Health (added Aetna's medical insurance assets to its existing retail stores and market-leading PBM) and Cigna (added Express Scripts PBM assets to its existing medical insurance operations). Outside of substantial regulator-led reforms, we think these vertically integrated organizations could help bend the healthcare cost curve in the United States, and UnitedHealth should be one of the key leaders of that charge.

The Centers for Medicare and Medicaid, or CMS, released Star Ratings for its Medicare Advantage plans that appear to have declined across the board. In this rating system that is used to identify the highest quality plans and determine bonus payments that plans can share with provider networks, CMS standards appear to have changed, causing contractions in membership percentages in 4-Star plans or better, which could mildly affect financial results of some managed care organizations, or MCOs. For example, CVS's Star Ratings looked relatively weak, causing shares to decline in the midsingle digits in early trading Oct. 7. While we have pulled back on some intermediate-term assumptions for CVS, management has already announced plans to offset these headwinds to meet its longer-term earnings growth goals, including double-digit earnings growth by 2024. Overall, we are not materially changing our fair value estimates or narrow moat ratings for any of the MCOs that we cover based on our initial take of these Star Ratings.