On Wednesday, Deutsche Bank adjusted its price target for UnitedHealth Group (NYSE:UNH), reducing it to $595 from the previous $632, while retaining a Buy rating on the stock. The revision follows UnitedHealth's third-quarter results and comments on the company's earnings per share (EPS) outlook for 2025. UnitedHealth's initial guidance for approximately $30 in EPS was roughly 4% below the consensus estimate of about $31.25. Additionally, the projected EPS growth of around 8% falls short of the company's long-term target of 13% to 16%.
UnitedHealth's guidance suggests an increase in the medical loss ratio (MLR) of 25-40 basis points for 2025, contrary to investor expectations of MLR improvement earlier in the day. The rise in MLR is attributed to several factors, including increased hospital coding intensity and a persistent gap between Medicaid patient acuity and state reimbursement rates. The latter issue is anticipated to marginally worsen in 2025 as Medicaid enrollment expands, negatively impacting the company's business mix.
A new challenge for UnitedHealth has emerged for the second half of 2024 and into 2025 due to the Inflation Reduction Act (IRA)-related drug costs and higher drug utilization. In the third quarter, UnitedHealth experienced a significant uptick in the use of specialty and expensive brand drugs, driven by changes in benefit design that will affect the next two years. The company believes it has accurately modeled these changes for 2025, but the unexpected increase in drug utilization late in the year—due to patients' lower financial responsibility—has led to persistently high drug use and escalating costs. Members might have reduced drug utilization under the 2023 benefit design.
Investors are cautioned that the accuracy of UnitedHealth's pricing for this part of the benefit will not be clear until the second half of 2025. This uncertainty is expected to create a potential overhang on UnitedHealth and other managed care organization (MCO) shares until mid-next year.
In other recent news, UnitedHealth Group has confirmed its full-year earnings outlook during its third quarter 2024 earnings call, despite obstacles such as Medicare rate cuts and Medicaid member redeterminations. The company reported a robust growth, serving over 2 million new consumers in commercial offerings and processing 1.6 billion prescriptions through Optum Rx.
The third quarter revenues reached $101 billion, marking a 9% increase, while UnitedHealthcare added over 2.4 million members. The adjusted earnings outlook for 2024 has been refined to $27.50 to $27.75 per share, with operational cash flow of $14 billion for the quarter.
The company projects the upper end for 2025 earnings to be around $30 per share. These are the recent developments, with a continued focus on value-based care and the utilization of AI to enhance care efficiency. The company faces challenges from Medicare rate cuts and Medicaid member redeterminations but remains optimistic about growth potential in Medicare Advantage and value-based care models.
InvestingPro Insights
To complement Deutsche Bank's analysis of UnitedHealth Group (NYSE:UNH), recent data from InvestingPro offers additional perspective on the company's financial health and market position. Despite the challenges outlined in the article, UnitedHealth maintains a strong market presence with a substantial market capitalization of $513.69 billion.
InvestingPro data reveals that UnitedHealth's revenue for the last twelve months as of Q3 2024 stood at an impressive $393.9 billion, with a revenue growth of 9.42% over the same period. This growth aligns with the company's status as a prominent player in the Healthcare Providers & Services industry, as noted in one of the InvestingPro Tips.
Regarding profitability, UnitedHealth's adjusted operating income for the last twelve months as of Q3 2024 was $32.2 billion, with an operating income margin of 8.31%. This solid performance supports another InvestingPro Tip, which indicates that the company has been profitable over the last twelve months.
It's worth noting that UnitedHealth has a history of consistent dividend payments, having maintained them for 32 consecutive years according to InvestingPro Tips. The company's current dividend yield stands at 1.51%, with a dividend growth of 11.7% in the last twelve months as of Q3 2024. This track record of dividend stability could be appealing to income-focused investors, especially given the uncertain outlook described in the article.
For investors seeking a more comprehensive analysis, InvestingPro offers 11 additional tips for UnitedHealth Group, providing a broader perspective on the company's financial health and market position.
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