UnitedHealth: Solid Quarter, Maintaining 2020 Outlook

Narrow-moat UnitedHealth Group UNH reported solid first-quarter operating results, and despite challenges presented by the COVID-19 crisis, particularly surrounding its own care provider operations, the company maintained its outlook for 2020. In general, UnitedHealth's results and outlook bode well for the discounted managed-care industry, and UnitedHealth shares appear moderately undervalued.

For the quarter, UnitedHealth beat Capital IQ consensus on both the top and bottom lines, and management noted that the COVID-19 crisis did not have a material impact on those results, given how late in the quarter that situation developed in the United States. Perhaps even more importantly, management also reiterated its guidance for 2020. The company continues to expect adjusted earnings per share of $16.25-$16.55 for the year, and our EPS projection remains within that range. In general, there appear to be several offsetting factors that could buoy UnitedHealth's near-term results. Also, management noted that risk-based (rather than fee-for-service) arrangements account for about two thirds of its service provider revenue, meaning about two thirds of those operations benefit from reduced care costs.

In addition to these financial disclosures, UnitedHealth also described a number of COVID-19 responses that suggest the immediate risks surrounding the health crisis are probably manageable for the organization and the industry as a whole. Investors have appeared concerned about medical costs that could rise and push down profits in a severe COVID-19 scenario. However, we suspect the inflated COVID-19 patient costs could be offset by reduced volume in other services, like routine care and elective procedures. For example, UnitedHealth's decision to assume all member costs associated with COVID-19 along with its plan to provide $2 billion of advanced payments to care providers, among other actions, suggest that overall medical costs will likely be well under control in 2020.

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