UNH Earnings Beat & Raise Not Enough to Maintain Rally

Sam (0:00)

Back on Morning Trade Live, let's focus on the one year chart for UnitedHealth. It managed to claw its way back after that dip earlier in the year. It has had three pretty strong quarterly earnings reports in a row now as it has managed to continue with its turnaround plans. We've come up the highs of the year, but we were actually one of the top gainers on the S&P 500 pre-market, but we've taken a turn now. We're down 6 tenths. It had actually been helping out the Dow as well, this morning, but not so much as mentioned. We've turned negative. Let's go through these latest earnings results. That is the focus of the morning trade. Joining us for a closer look is Mrs. Kovacs. Good morning, Jenny.

Just walk us through what we learned from this company. It looked like they were seeing some pretty good results here, but we've seen the reaction turn negative.

Jenny Kovacs (0:47)

We have. Modestly, comparing this name and just looking at the broader health care earnings like J&J, for example, down four and a half percent, and United was received as the clear winner, at least free market. As you said, though, we've given back a lot of that strength. And so it does seem like there was still a lot of evidence that this broader turnaround is taking hold. And this was frankly, though, a margin and guidance story. Revenue does still remain relatively sluggish, but to run through what did work, I mean, there was a big earnings beat. We saw adjusted earnings per share at $4.69, well ahead of expectations. Guidance was raised again. They increased their 2026 adjusted earnings outlook to at least $20.50, well ahead of the prior range of around $19.50 to $20 a share. Medical cost trends improved. We saw that medical care ratio, the MCR, fall to 88.4% from 89.9% last year. That was also better than expected, thus signaling this stronger profitability and better cost control. Margins recovered significantly. We saw operating margins expand to 5.8% from just around 3.8% last year, indicating again some further proof of this turnaround effort. Both of their major businesses also outperformed expectations. We saw UnitedHealthcare and Optum exceed operating earnings expectations across the board. And they did mention this investment in AI as well as value-based care, pricing discipline and exiting some unprofitable contracts that are helping to stabilize their overall profitability. That being said, though, revenue did fall about 4.5% year over year, marking a rare top line contraction for the company. Membership also continues to shrink. We saw the end of the quarter with 48.3 million members. That was down from the prior years. Again, they exit those unprofitable or less profitable businesses. Insurance revenue also did fall about 8.5% from last year. But Optum growth does remain relatively uneven.

One major concern is also medical costs are still elevated. Management did say that healthcare utilization and specialty drug costs do remain still above historical norms, even if trends improved throughout the quarter. Part of the margin improvement also did come from more favorable reserve development. The quarter benefited from roughly 610 million unfavorable reserve adjustments, which many may see as less repeatable and more of less organic as far as just overall improvements for the margin story.

So the key debate has been whether medical costs would remain elevated and keep crushing their margins. They've really shown the opposite. Medical costs improved margins to expand and earnings beat by a pretty significant margin. The bears, I think, are pointing to more of these declining membership trends and essentially flat revenue growth. But right now, it does seem like the focus is a bit more on this ongoing margin recovery and its earnings power going forward. The raised outlook is also a very major takeaway.

Well, again, there's sluggish trends to make note of here. I think that the initial reaction to be made a bit more sense for a company that is operating in a relatively challenged and also government exposed space and is still the largest issuer of private health care. So a very important read on just those broader health care trends. Monas moved to the downside, but this was still, I would say, a pretty strong report for a company proving its turnaround is taking hold, Sam.

Sam (4:05)

Yes, certainly seeing the fruits of their labor. I think that's really important that MCR, as you mentioned, the medical cost ratio was something analysts were honing in on very, very closely. And obviously we've seen some improvement there. So really appreciate the details, Jenny. Thanks so much. Let's trade it now with option strategist Tim Biggam. It's interesting, Tim. I mean, it wasn't that long ago. This was a $600 stock. We have managed to claw back some with the strength of these last three quarterly reports. But what do you make of the move we're seeing right now? We've turned negative and just walk us through an example trade.