By all rational measures, United Health (NYSE:UNH) produced a very solid performance for its second quarter fiscal 2018 earnings report. The country’s biggest health-insurance provider exceeded profitability expectations, while meeting the consensus target for revenues. Still, after the financial disclosure, United Health stock dropped 2.6% before clawing its way back up on Wednesday.
Is this another case where an earnings beat doesn’t align with market results? While the “paper stats” were impressive – United Health hit an earnings per share of $3.14, up 3.2% from the $3.04 consensus target – Barron’s Teresa Rivas notes that much of the positive surprise boils down to non-operating factors.
Taking out the impact of components like lower corporate taxes, Q2 results are more closely aligned with expectations.
A Closer Look at United Health Stock
Another sticking point was insurance premiums, or the amount covered people pay monthly. FactSet consensus pegged United Health premiums to deliver $44.59 billion. Instead, the actuals came in just shy of the target at $44.46 billion.
However, that’s less than a 0.3% miss. More notable was the fact that the insurer increased premiums 12.3% on a year-over-year basis. In Q2 2017, premium revenues totaled $39.59 billion.
Additionally, in Q2 2016, the premium was $36.4 billion, or a near 9% increase between 2016 and 2017. Therefore, premium growth is actually increasing, which shouldn’t merit a panicked sell-off.
So why the concern within Wall Street? Part of it comes down to United Health stock becoming frothy. Year-to-date, shares are up over 16%. Last year, and in 2016, the company delivered approximately 39% returns. In 2015, shareholders received a robust 18%.
More importantly, United Health has competitive risks. Walmart (NYSE:WMT) and Amazon (NASDAQ:AMZN) seek to disrupt the healthcare industry. Plus, President Trump’s prescription-drug pricing proposal clouds the sector with uncertainty.
United Health Stock Revenue Stream
Does this mean that investors should abandon ship? I personally am not buying United Health as it doesn’t fit the risk-reward profile that I’m specifically seeking. However, it’s a stalwart stock, which gives it incredible stability as part of a longer-term strategy. If that’s you, the insurer does have notable positives, namely, its near-perpetual revenue stream.
If you take a look around, you’ll notice that Americans aren’t the healthiest bunch. This isn’t just conjecture.
According to The Atlantic’s Julie Beck, the average American male “has a body mass index just barely under the medical definition of obese.” More than 50% of all Americans eat ultra-processed foods. And the Mayo Clinic Proceedings reported that less than 3% of us live a “healthy lifestyle.”
I reported earlier this month that processed-food consumption and health expenditures as a percentage of GDP have both increased sharply since the 1960s.
To further this point, consider that cigarette smoking – an unnecessary catalyst for all kinds of diseases – has sharply declined. In its place are vaporizers, which are cleaner and arguably healthier platforms.
So we’re giving up cigarettes, but we just can’t kick our processed-food habit. That only benefits United Health stock. Even if processed foods weren’t the ultimate culprit, health expenditures are going up, never down.For the full-year 2011, UNH premiums increased 7.7% against 2010 results. Last year, the premium increased 10%, while in the most recent Q2, we saw over a 12% jump.
I’m not just cherry-picking numbers. From 2011 to 2014, the average premium growth rate was 7.8%. From 2015 onwards, it’s currently 11.2%.
I, along with several members of the medical community, blame processed foods. But whatever your health boogeyman, Americans are undeniably unhealthier, and they’re paying for it.
Health Insurance Is a Robust Sector
To further add confidence to your possible purchase of United Health stock is the underlying sector. Health insurance is a robust sector, and based on American lifestyle trends, it will only improve in strength.
All key UNH competitors have delivered impressive market performances this year. Aetna (NYSE:AET) is up 6.3%, while Anthem (NYSE:ANTM) has gained 11.2%. Humana (NYSE:HUM) is the runaway leader at 27.6% YTD.
That said, be sure to understand what you’re aiming to achieve with UNH stock. If you’re seeking a high-flying investment, I’m not sure you’ll get it, especially considering recent outstanding returns. But if you want reliability, and have a longer-term outlook, United Health has strong, fundamental tailwinds.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.