UnitedHealth: Pent-Up Demand Returning to Providers Could Hurt Near-Term Medical Loss Ratios

UnitedHealth Stock at a Glance

• Fair Value Estimate: $462
• Morningstar Rating: 3 stars
• Morningstar Uncertainty Rating: Medium
• Morningstar Economic Moat Rating: Narrow

UnitedHealth Stock Update

At an investor conference, narrow-moat UnitedHealth UNH made comments about the surging demand for healthcare services in the second quarter, which pushed shares down 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.

If this healthcare bellwether’s experience represents an industrywide trend, demand for healthcare services and related supplies could be in the midst of an upswing. This could help the shares of service companies (like HCA HCA and Tenet THC) and related suppliers (like Baxter BAX and Fresenius SE FRE), while managed-care organizations may face margin pressure on medical loss ratio concerns.

The COVID-19 pandemic has largely been a boon for managed-care organizations, or MCOs, and a bust for medical service providers and related suppliers due to weak medical utilization and inflationary pressures. UnitedHealth’s comments suggest those trends may be reversing a bit, which could somewhat reverse the stock stories as well.

Considering these trends, we have mildly pulled down our 2023 EPS estimate for UnitedHealth to the middle of management’s existing outlook range of $24.50-$25.00 (10%-13% expected growth, or beneath its long-term goal of 13%-16% annual growth). That slight adjustment did not materially change our fair value estimate, which is based on longer-term assumptions. Investors should realize, though, that UnitedHealth and other managed-care providers may limp through the rest of 2023 into a tough 2024 as Medicaid redeterminations continue, regulatory scrutiny increases on pharmacy benefit managers, and Medicare Advantage growth looks set to decelerate. If MCO shares pull back significantly on these growing near-term headwinds, we think investors with a long-term horizon should recognize MCO share discounts as opportunities.