UnitedHealth Group Inc. (UNH, Financial) is one of the largest health insurance providers in the United States, offering a range of health insurance products and services to individuals, employers and government programs. It provides coverage for medical, dental, vision and pharmacy services, among others. UnitedHealth works with a network of health care providers and facilities to offer a broad range of healt hcare options to its customers.
From a business perspective, it is known for its high market share. It serves millions of individuals and organizations across the United States and has a strong network of health care providers and facilities. The company claims it is committed to advancing health care through its insurance offerings, health care services and technology solutions.
The shares of UnitedHealth witnessed a major selloff on June 14, closing the day at $459.86, down 6.40%. This steep drop was likely due to the company's warning of rising costs in the second quarter of 2023. This is bad news, but personally, I believe the selloff is overblown. The bigger picture remains positive for the company, as its fundamentals are robust and its wide economic moat supports continued strength in business operations.
UnitedHealth warned of rising costs
The health insurance provider warned about rising costs because now that the pandemic seems to be under control, seniors are choosing to have elective surgeries that have delayed them, mostly knee and hip procedures. Tim Noel, CEO of UnitedHealth’s Medicare and retirement business, indicated that now that mask mandates and other Covid-19 restrictions have been lifted, more seniors are comfortable with accessing services for treatments they might have delayed before.
Chief financial officer John Rex said the trend towards more elective surgeries could push the company’s ratio of costs for claims versus premiums toward the upper range of its full-year outlook in the second quarter.
This factor will harm the profitability of UnitedHealth, raising its costs. However, this surge in elective surgeries by seniors will likely only be temporary, just like the pandemic was. After the backlogged surgeries are done, things should return to normal. Additionally, UnitedHealth can pass a large portion of the inflation to its premiums as it has enough of a moat that customers don't really have the choice to refuse, which will mitigate the increased expected costs.
Fundamentals remain strong
The fundamentals for UnitedHealth remain very strong. The company has a debt-to-equity ratio of 0.87, which is not excessive, as well as an interest coverage ratio of 11.23 and a Piotroski F-Score of 8 out of 9. The GF Score of 97 out of 100 suggests outperformance potential according to a historical study by GuruFocus.
The company has increased its net margin to 6.25% for 2022, the highest level since 2016 and solid among its peer group. This indicates the presence of a potential competitive advantage, a hypothesis which is further supported by the broader economic moat the company has.
A strong economic moat
UnitedHealth appears to have a strong economic moat, primarily due to the following factors: scale, diverse business segments, integrated health care services, a wide network of health care providers, technological capabilities and financial strength.
UnitedHealth is one of the largest health care companies in the United States, serving millions of customers. The company's scale allows it to negotiate favorable contracts with health care providers and pharmaceutical companies, resulting in cost advantages and better pricing for its customers.
UnitedHealth operates through two main segments, UnitedHealthcare and Optum, which provide a diverse range of health care services. This diversification helps the company mitigate risks associated with changes in health care regulations and market dynamics. It also allows UnitedHealth to capture value across the entire health care value chain, from insurance to technology solutions.
UnitedHealthcare provides health insurance coverage, while Optum delivers a wide range of health care services and technology solutions. This integration enhances the customer experience, improves efficiency and strengthens the company's competitive position.
Let's talk a bit more about Optum, the technology and services segment of UnitedHealth. This segment has developed advanced health care analytics, data management and technology solutions. These capabilities allow the company to leverage data-driven insights, enhance health care delivery and drive efficiency. The investment in technology via Optum makes it challenging for competitors to achieve the same level of expertise and infrastructure.
UnitedHealth's strong financial position and cash flows mean it can invest more in research and development, strategic acquisitions and other growth initiatives. This means the company has solid chances of being able to keep its industry technology dominance.
This surge in elective surgeries is not good news for profitability in the near-term. However, I don't think this situation will last for long, and the negative effects will be only temporary. UnitedHealth looks modestly undervalued now in my opinion, and the recent selloff could thus provide a margin of safety.
