United Healthcare: Earnings, A $200 Billion Overreaction

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a day ago

One of the most dramatic reactions from the Q1 2025 earnings season came from United Healthcare (NYSE:UNH), which shed over $200 billion in market cap and cratered 23% intra-day post-earnings along with continued decline upon the resignation of its CEO and a potential DOJ inquiry. At first glance, that kind of move suggests something catastrophic although the actual results paint a very different picture.
Warning! GuruFocus has detected 4 Warning Sign with UNH.
The selloff was driven by a 2% increase in Medicare Advantage costs and higher utilization trends (greater related medical expenses), which led to a reduction in 2025 earnings guidance from $29 to $26 per share initially and later with guidance lifted. That's collectively a $3 hit to EPS which is material from initial guidance, but not earth-shattering especially considering UNH is stil projected to have 20.65 billion in 2024 full year net income based on revisions of major investment banks aggregated by Refinitiv along with 25-30 billion for FY26. That level of profit implies a P/E of roughly 12 and a forward P/E of less than 10 (representing a forward cash flow yield of 10%, a truly absurd financial metric for a company of this size), which is deeply discounted for a business of this scale, profitability, and consistency. The increase in utilization is also expected within the earnings call to normalize to historical averages in the near future and this isn't the first time a Medicare Advantage utilization has caused the share price to decline. In June 2023 a similar utilization increase was seen and the effects were short lived, negligible to profitability and the share price quickly was achieving new highs just a six weeks later. Given how the insurance operation works, premiums can also be raised to offset additional care expenses encountered to maintain similar margins and levels of profitability.
The CEO also stepped down due to stated personal reasons, while for investors having a CEO step down is typically seen as something negative, the successor for the position is the long term prior CEO Steven J Hemsley, an executive that oversaw exceptional increases in financial operations, efficiency, and stewardship of the company through industry opportunities. While the stock declined rather significantly upon his appointment, this would seem to be dramatic given the prior CEO executed incredible shareholder returns and growth of operations. The last contributor to major negative sentiment is the "announcement/accusation" by journalists a DOJ probe into medicare advantage billing escalating from civil to criminal (uncorroborated by the DOJ or any legal agency), the company explicitly denied any knowledge or informational requests related to such a probe or its supposed existence and given a prior legal ruling in the civil case that there was no apparent incorrect coding for billing, the legitimacy of this seems to be in question. While if the probe is found to be legitimate in the future, as incredible as it sounds, the company would also likely not have any difficulty financing a fine/outlay of significant size.
UNH generates profits from a few large business segments albeit diversified due to the massive scale, the insurance operation in which premiums are received and invested/used to pay out claims respectfully and represents the largest health insurer in the US. The other major component of business operations is Optum, which consists of its pharmacy benefit manager operations, Optum Health which directs healthcare directly, and Optum Insights which provides data analytics and consulting. The hit to guidance was within the legacy insurance segment, which remains wildly profitable although the real driver of earnings growth (a greater than 50% share of net income) is seen within Optum which would seem to be unaffected.
UNH's capital allocation strategy has historically been a masterclass in shareholder returns. The company has averaged 2-4 billion in quarterly stock buybacks, while simultaneously paying out close to $8 billion in annual dividends all without compromising operations or balance sheet strength. The most recent buyback spike in Q4 2024 was nearly $5 billion, the largest in the past three years. Based on the outlandish profitability of UNH and the businesses clear willingness and ability to reward shareholders, once you throw in the fact that there is a significant discount being placed on the business by the market, it becomes clear this is a sizable overreaction and not reflective of the operations or strength of the company.
*historically repurchases accelerate for UNH under market declines
This level of profitability and shareholder alignment is rare, and it's even more compelling now that the market has mispriced the stock on short-term guidance noise. The biggest opportunities in investing often come when price temporarily detaches from financial reality and that's exactly what this looks like.
With the regime of a current market built on fear and facing macroeconomic struggles, health insurance is generally considered a defensive, non-cyclical industry because demand for healthcare remains relatively stable regardless of economic conditions. People don't stop needing medical care during a recession and if anything, economic stress can drive higher Medicaid enrollment or subsidized marketplace coverage. For insurers like UNH, revenue is largely tied to premiums and government reimbursements, which are contractual or regulated and don't fluctuate with consumer sentiment or discretionary spending trends. Even during downturns, enrollment can remain stable or even grow as individuals shift from employer-sponsored plans to government-backed options. Unlike cyclical sectors like consumer discretionary or industrials, healthcare spending is inelastic and people prioritize it no matter what. Moreover, Medicare Advantage and Medicaid, which are a large part of UNH's book, are government-funded and relatively insulated from short-term economic cycles.
As for the broader industry landscape, there are no meaningful moves underway to undercut or dismantle the private health insurance model. The regulatory outlook remains stable, and there are no current legislative pressures that would structurally alter the business model of companies like UNH.
Importantly, this volatility in premiums is limited to the UnitedHealthcare segment. Optum UNH's faster-growing, higher margin division which continues to deliver strong performance across health services, pharmacy benefits, and data analytics. Together, this structure gives UNH a diversified revenue model that can weather temporary shocks in one segment without compromising overall earnings power and represents a significantly undervalued equity at current market prices.
* TipRanks. (n.d.). UnitedHealth (NYSE:UNH) stock buybacks. Retrieved May 3, 2025, from https://www.gurufocus.com/stock/unh/buybacks
This article first appeared on GuruFocus.