Is UNH Stock A Buy Right Now? Here’s What Earnings, Charts Show

Heading into the end of July, UnitedHealth Group (UNH) was not one the year’s top five stocks on the Dow Jones Industrial Average.


It was No. 6. Up more than 18% since the start of the year, it had outrun the S&P’s 17.5% advance through July 26. Over the prior 10 years, UnitedHealth stock maintained an average annual gain of better than 26%. Just after its second-quarter report in mid-July, the stock had formed a nicely shaped cup-with-handle base.

UnitedHealth Group was one of several Dow Jones Industrial Average components that rallied briefly following the Nov. 3 election, then settled in a consolidation below an early November high.

The coronavirus pandemic, Republican efforts to dismantle the Affordable Care Act and the threat of industry disruption from ventures such as those of (AMZN), Berkshire Hathaway (BRKA) and JPMorgan (JPM) all figured into a complex year for the company and its investors.

Now the Affordable Care Act is, at least for now, being shored up. And the disbanding of the Amazon-Berkshire-JPMorgan health care efforts negate what had seemed a significant industry threat.

But the U.S. remains embroiled in complex political discussion and industry changes regarding the nature of managed health care. So, against this challenging backdrop, is UnitedHealth stock a buy?

UnitedHealth Group Anatomy

UnitedHealth is the largest U.S. managed care provider. Its $388 billion market capitalization is nearly five times that of Cigna (CI) or Anthem (ANTM), and more than six times the market cap of Humana (HUM). The other big industry player is CVS Health (CVS), which acquired Aetna for $69 billion in November 2018. A month later, Cigna paid $58 billion for pharmacy benefits manager Express Scripts.

CVS Health’s pharmacy services segment was 53% of the company’s total revenue of $268.71 billion in 2020. Health care benefits, which included the Aetna business, were $75.47 billion, or just over 28% of revenue. UnitedHealth’s UnitedHealthcare managed care business was 78% of its total 2020 revenue.

UnitedHealth’s medtech arm, Optum, has made a string of mostly smaller, technology-based strategic deals. In June 2019, it paid $3.2 billion to acquire health care payments firm Equian, and closed its $4.3 billion acquisition of DaVita Medical Group, a chain of medical practices, from DaVita (DVA).

The Optum unit acquired patient-monitoring start-up VivifyHealth in October, 2019. Last year, UnitedHealth’s Optum segment acquired virtual therapy provider AbleTo for $470 million.

UNH And ObamaCare

Following the health insurance space is always complicated. That is particularly true now, as coronavirus pandemic concerns challenge the U.S. health care system. Political concerns also remain a critical factor for UNH stock performance, as politicians in Washington fight on one side to dismantle and on the other to prop up the Affordable Care Act, which launched in 2010.

The back-and-forth contraction and rebounding of the program widely known as ObamaCare has dictated piecemeal strategies among health care providers, and has led to much uncertainty on pricing for health care plans.

UnitedHealth, for example, had expanded its participation in ACA’s individual health insurance exchanges to 34 states in 2016. Program changes during the Trump administration helped undercut profitability, leading UnitedHealth to cut back to health insurance exchange (HIX) participation in only three states in 2017. UnitedHealth filed early in 2020 to rejoin the exchange in Maryland. Analysts expect it to expand to more states this year

UnitedHealth has nevertheless managed to maintain a strong 21% earnings growth rate since 2016. As mentioned earlier, UNH stock has averaged an annual share-price increase of more than 26% in the 10 years since the ACA was enacted in 2010.

UNH Stock Fundamental Analysis: Post-2020 Checkup

At the end of the second quarter, UnitedHealth Group served more than 49 million individuals across all its businesses. On the commercial side, more than 18.4 million of those are in fee-based programs. Another 7.84 million are under risk-based contracts. The Medicare and Medicaid portions of the business cover another 17.91 million individuals. All of the numbers are higher vs. end-of-year numbers for 2020.

UnitedHealth’s earnings growth had gradually accelerated to a 28% gain in 2018, up from a 7% advance in 2015. Earnings in 2019 slowed to a 17% increase. The year’s revenue gain also slowed, to 7% vs. 12% in 2018.

For 2020, earnings rose 12% and revenue growth slowed to 6%.

Long-term debt was $44.348 billion at the end of the second quarter, up from $38.648 billion at the end of 2020. Over the same period, cash and short-term investments were $22.561 billion, up almost 15% from the 2020 year-end cash box. UnitedHealth’s debt-to-equity ratio is 59%, well below the 96% ratio for Cigna and CVS Health’s 85%.

UNH Stock Technical Analysis: Bullish Handle

UnitedHealth is a big stock, with an average of around 1.3 million shares trading hands daily. Its stock price corrected less than 39% during the pandemic-caused sell-off in 2020, not bad for a bear market.

The Dow Jones issue has built three bases over the past 12 months, including a four-month base from November to March. UNH stock broke out from that base in mid-March. After some vacillation, it rose 15%, then rolled over into its current pattern.

Heading into the end of July, UNH stock traded about 3% below a 422.63 buy point in what IBD MarketSmith analysis identifies as an 11-week cup-with-handle base. The stock carries an 88 Composite Rating from IBD, making it the No. 4-ranked stock in IBD’s managed care industry group.

The group itself in late July ranked No. 78 among the 197 industry groups tracked by IBD.

Is UnitedHealth A Buy?

So if shares break out past the 422.63 buy point, is UNH stock a buy? The answer is a cautious yes. It is a well-formed base. And the handle has so far shown healthy support at its 10-week moving average.

There are some caveats. One is that UnitedHealth’s Relative Strength Rating has dribbled below the 80 level you’d like to see as a minimum. Its relative strength line has trended lower since hitting a high in May. That’s not the sort of behavior you’d expect from a stock about the break to new highs. These are yellow flags.

On the other hand, UNH stock’s Accumulation/Distribution Rating is a B, on an A+ to E scale with A+ tops. And its up/down volume ratio is a very positive 1.5. Taken together, this suggests that institutional investors are accumulating shares.

Politics is an Achilles heel for many medical services sector stocks. For now, Democrats hold so narrow an advantage in Washington that progress toward further health care reform is unlikely. That’s a positive for UNH, suggesting some level of predictability.

But the 2022 midterm elections are coming up fast. There is no way to tell how health care sector investors might respond ahead of those elections, and how the political landscape could potentially be changed afterward. So investors who do buy into UNH stock should plan to keep an eye on the headlines.

Find Alan R. Elliott on Twitter @IBD_Aelliott

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