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UnitedHealth Reports Strong Q3, Conservative on 2021

Despite a conservative 2021 outlook, we're maintaining our fair value estimate for the narrow-moat company.

Narrow-moat UnitedHealth Group UNH reported third-quarter operating results that beat Capital IQ consensus on the top and bottom lines, which allowed the organization to raise its adjusted earnings per share outlook for the year mildly. However, management also highlighted that its outlook for 2021 may be more conservative than usual given the ongoing headwinds related to the coronavirus pandemic and uncertain economic environment. So while our earnings estimate for 2020 appears slightly below below the firm's outlook range, our below-consensus view on 2021 may remain appropriate. Therefore, we are maintaining our fair value estimate of $304 per share, for now.

In the quarter, UnitedHealth turned in revenue of $65.1 billion, above consensus of $64.0 billion. Management highlighted strength in its Optum operations, particularly in its healthcare services business that bounced back from weak utilization figures in the second quarter. Year-over-year growth in volume and revenue per consumer were particularly strong. Also in insurance, continued expansion in its Medicare Advantage and Medicaid managed-care contracts helped offset weakening conditions in the employer market. However, management anticipates that the full effects of the economic weakening in terms of reduced insurance rolls and mix shifts to Medicaid are still to come.

On the bottom line, the firm beat analyst expectations and was able to increase its 2020 outlook slightly, despite expectations for ongoing pandemic conditions that resulted in increased outflows in the quarter. During the quarter, UnitedHealth generated $3.51 of adjusted earnings per share, lower than the year-ago period but higher than consensus ($3.08). Management highlighted that these results included voluntary COVID-19-related cost-sharing initiatives that pressured the medical cost ratio. Despite those ongoing outflows, management raised its earnings guidance for 2020 to $16.50-$16.75 from $16.25-$16.55.

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About the Author

Julie Utterback

Senior Equity Analyst
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Julie Utterback is a senior equity analyst for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. Within the healthcare industry, she covers medical technology and service companies. She is also the chairperson of the equity research team’s capital allocation methodology.

Utterback joined Morningstar in 2005 as an equity analyst in the healthcare industry. At that time, she covered medical technology companies, including orthopedic device, medical equipment, and cardiac device firms. In 2010, she joined Morningstar's credit research team, initiating coverage of the entire healthcare industry and generally helping the organization expand and maintain its credit coverage across many industries. She held that senior credit analyst role until April 2019, when she returned to the equity team to cover medical technology and service companies.

Prior to joining Morningstar, Utterback was an equity analyst at State Farm Insurance for several years. She holds a bachelor's degree in finance from the University of Illinois Urbana-Champaign. She also holds the Chartered Financial Analyst® designation.

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