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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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