[October.2024] The insurance giant with a decade-long stock surge: How to decode its earnings

In the U.S. stock market, long-term growth stocks are common, but those that rise consistently for over a decade are rare. $UnitedHealth (UNH.US)$ , a giant in the health insurance and medical services industry, is one such standout. From 2009 to 2022, UnitedHealth's stock rose for 14 consecutive years. Despite a slight dip of less than 1% in 2023, it has reached new highs this year, soaring more than 20 times since 2009.

UnitedHealth's impressive performance in the capital market is closely tied to its long-term financial trajectory.

On October 11, $UnitedHealth (UNH.US)$ will release its latest earnings report. Each earnings release may signal a potential investment opportunity, but before diving in, investors need to understand how to interpret their financial statements.

How should we evaluate UnitedHealth's earnings? We should focus on its core business, growth drivers, and profitability.

1. Core Business

$UnitedHealth (UNH.US)$ operates mainly in two areas: health insurance and medical products and services through Optum. These segments complement each other—health insurance brings customers to Optum, while Optum provides valuable data and reduces claims costs through economies of scale in pharmaceuticals and services.

Health insurance is the core of UnitedHealth, accounting for about 55% of its revenue. It's also the primary source of customers, forming the foundation of all its operations.

Revenue from the health insurance segment has been consistently strong. From 2010 to 2023, it grew every year, with double-digit increases in the last three years. Revenue jumped from $82.73 billion in 2009 to $281.36 billion in 2023, nearly a 1.5-fold increase over 14 years. Although growth has slowed slightly in the first two quarters of this year, it still exceeded 5%.

UnitedHealth's revenue growth in its health insurance business primarily hinges on total premiums collected. This, in turn, depends on two key factors: the total number of healthcare members and the average premium per member.

In terms of membership, $UnitedHealth (UNH.US)$ has seen substantial growth through acquisitions and business expansion. Membership increased from 32 million in 2009 to over 50 million in 2023, showing growth in most years and stabilizing more recently. However, there was a slight decline in membership in the first two quarters of 2024.

$UnitedHealth (UNH.US)$ has seen a decade of consistent growth in average premiums per member since 2015. By 2023, the average premium exceeded $5,500, more than double that of 2015. High inflation in 2022 and 2023 contributed to this rise, with average premiums increasing by over 10% year-over-year during these years. The trend continued with double-digit growth in the first two fiscal quarters of this year.

Looking ahead, for UnitedHealth's health insurance business, we may need to monitor two things: whether the total number of healthcare members can return to steady growth after the recent dip and whether average premiums can maintain a growth rate of over 5% once the high inflation period ends.

2. Growth drivers

While health insurance is the foundation of $UnitedHealth (UNH.US)$ , the Optum segment is its primary growth engine.

From 2010 to 2023, Optum's revenue grew by more than 10% in most years, increasing from $20.4 billion in 2009 to $226.6 billion in 2023, a tenfold rise over 14 years. Its revenue contribution also climbed from under 20% to nearly 45%.

Optum's revenue can be divided into three segments: Optum RX, Optum Health, and Optum Insight.

• Optum RX: This segment focuses on pharmacy benefit management (PBM). Leveraging the company's large customer base, Optum RX negotiates lower drug prices with pharmaceutical companies and pharmacies, earning a profit margin. In 2023, Optum RX generated $116.09 billion in revenue, up 16.4% year-over-year, accounting for over half of Optum's total revenue.

• Optum Health: This segment manages healthcare services, partnering with hospitals and medical service providers to offer healthcare services to customers. It also benefits from economies of scale. In 2023, Optum Health generated approximately $95.32 billion in revenue, accounting for over 40% of Optum's revenue, with a year-over-year growth rate of 33.9%. Historically, its growth rate has exceeded 20% in most years, making it the fastest-growing segment within Optum.

• Optum Insight: This segment provides information services to the healthcare and insurance industries, supporting both internal operations and external revenue generation. Although its revenue contribution is smaller, it plays a crucial role in supporting the overall business.

In upcoming fiscal quarters, we may monitor whether Optum RX can maintain its steady growth and if the rapid growth of Optum Health continues, thereby driving the overall revenue growth of UnitedHealth.

3. Profitability

UnitedHealth's long-term stable stock performance may be largely due to its improved profitability. From 2009 to 2023, the company's net margin increased from 4.39% to 6.23%, and its net income grew from around $3.82 billion to approximately $22.38 billion—nearly a fivefold increase, far outpacing revenue growth over the same period.

Additionally, UnitedHealth's return on equity (ROE) rose from 17.2% in 2009 to 26.9% in 2023, marking a significant improvement.

The rise in profitability is largely due to the growing revenue from the more profitable Optum segment. The operating profit margin for the health insurance business fluctuated between 5% and 8% (at 5.8% in both 2009 and 2023). In contrast, Optum's operating profit margin has consistently been between 7% and 9% in recent years, showing stronger profitability than the health insurance segment.

In upcoming fiscal quarters, we may watch whether Optum's revenue contribution continues to grow, thereby boosting UnitedHealth's overall profitability.

Beyond UnitedHealth's own profitability, it's also useful to compare it with industry peers. Although a net margin of under 10% might not seem exceptional, it stands out in the health insurance industry. For instance, among the top ten health insurance companies in the U.S., six are publicly traded, and in 2023, the net margins of the other five were all below 5%, significantly lower than UnitedHealth's.

Going forward, we should continue to monitor whether $UnitedHealth (UNH.US)$ can leverage its scale and operational capabilities to maintain its leading edge in profitability.

Having read this far, you may now have a deeper understanding of how to interpret UnitedHealth's financial reports. It's noteworthy that the release of earnings reports from prominent companies may present unique trading opportunities for different types of investors.

For instance, if an investor, after analyzing past reports and considering recent developments, believes a company's latest earnings will send positive signals and boost the short-term stock price, they might consider taking a long position. This could involve buying the underlying stock or purchasing call options.

Conversely, if the investor expects the earnings to be unfavorable and potentially pressure the stock price, they might consider taking a short position, either through short selling or buying put options.

If the report's outcome is unclear but volatility is expected, they might use a straddle strategy, buying both calls and puts.

However, investors should carefully assess their risk tolerance, particularly when considering high-risk trades like short selling or options, before making any trading decisions.

Summary

For UnitedHealth's financial reports, we should focus on its core business, growth drivers, and profitability.

1. Core Business (Health Insurance):

1. Monitor whether the number of health insurance members can return to steady growth in upcoming quarters.

2. Watch if the average premium per member can continue to grow at a high rate.

2. Growth Drivers (Optum):

1. Observe whether the Optum RX segment can maintain its steady growth.

2. Track if the rapid growth of Optum Health can be sustained.

3. Profitability:

1. Check if the revenue contribution from the more profitable Optum segment can increase further.

2. Compare the overall profitability to industry peers to see if UnitedHealth can maintain its leading edge.