UnitedHealth Group (UNH) Reports Strong Earnings, Faces Stock Decline: What Led to the Drop

In an early Friday announcement, UnitedHealth Group (UNH), a major player in the Dow Jones health care sector, outperformed fourth-quarter estimates but noted that medical costs as a percentage of premiums were higher than anticipated by analysts. Despite comfortably beating expectations, UNH stock, which has been trailing in the recent market rally, experienced a decline in early stock market activity, reflective of the broader defensive-oriented industry trend.

Analysts projected fourth-quarter UnitedHealth earnings per share to be $5.98, reflecting a 12% increase from the previous year, with revenue expected to grow by 11% to $92.1 billion. The medical cost ratio, indicating the percentage of premiums allocated to cover members’ health needs, was anticipated to rise to 84.1 from 82.8 a year ago.

UNH surpassed expectations, reporting an EPS growth of 15.4% to $6.16 per share, exceeding the consensus by 16 cents. Revenue also demonstrated robust growth, reaching $94.4 billion, a 14.1% increase and comfortably ahead of estimates. However, the medical cost ratio surged to 85 in Q4, attributed to factors such as outpatient care for seniors and a business mix that skewed toward higher costs in government programs compared to commercial coverage.

UnitedHealth maintained its guidance, reiterating full-year EPS projections of $27.50 to $28. The company acknowledged a $100 million unfavorable development in medical reserves in Q4, leading to a net positive development of $840 million for the year. This marked the first negative revision since 4Q16, raising concerns about the potential impact on pricing in 2024.

Jefferies analyst David Windley pointed out that net interest income and the tax rate contributed an additional 52 cents to EPS compared to the consensus. Despite the positive earnings outcome, Windley maintained a hold rating on UNH stock.

UNH stock faced a 3.4% decline to $521.51 in Friday’s stock market activity, dropping below its 50-day and 10-week moving averages and reaching a three-month low. The stock had a buy point of $558.10 from a consolidation period starting in November 2022. Notably, UnitedHealth has exhibited sideways movement since April 2022, and its relative strength line against the S&P 500 index has been decreasing since November 2022.

While UNH stock remains on the IBD Long Term Leaders list due to its history of reliable double-digit earnings growth and share-price outperformance, the recent decline emphasizes caution. Investors are advised to monitor the prevailing stock market trend and exercise prudence before making decisions based on short-term stock movements.