UnitedHealth Has a High-Class Problem

UnitedHealth Group's campus in Minnetonka, Minn. The company’s net profit margin of 3.8% fell 1.1 percentage points from a year earlier. ENLARGE
UnitedHealth Group’s campus in Minnetonka, Minn. The company’s net profit margin of 3.8% fell 1.1 percentage points from a year earlier. Photo: Jim Mone/Associated Press

For years, UnitedHealth Group UNH -0.16 % has spoiled its investors. That came back to bite the stock Thursday.

Third-quarter revenue came in at $ 41.5 billion and earnings per share at $ 1.65, both of which topped analyst estimates. Yet the shares dipped as the company’s net profit margin of 3.8% fell 1.1 percentage points from a year earlier. UnitedHealth attributed the weaker margin, in part, to greater levels of lower-paying, government-sponsored benefits business.

Perhaps the real trouble for the stock, however, is the high bar that the health-insurance giant has set with its track record.

Consider, for instance, that UnitedHealth’s quarterly earnings haven’t missed analyst forecasts in at least the past five years, according to FactSet. So while this quarter’s result topped expectations by one cent, it was the weakest performance relative to expectations in more than a year.

UnitedHealth also affirmed, rather than raised guidance, for full-year earnings. For most companies, that would be a positive. For UnitedHealth, that is something of a disappointment: it had raised forecasts in the previous two quarters.

ENLARGE

Investors shouldn’t miss the forest for the trees, however. It’s premature to worry that UntitedHealth’s underlying business is weakening. In the nine months through September, revenue is up 17% year over year and earnings 12%.

Earnings per share likely would have come in even higher with more share repurchases. UnitedHealth’s $ 12.8 billion acquisition of pharmacy-benefit manager Catamaran, which closed in July, has temporarily restrained buybacks as the company opts to deleverage its balance sheet. So far in 2015, the company has bought back $ 1.1 billion worth of stock, down from $ 3 billion a year ago.

Any worries about UnitedHealth’s prospects may be overdone. That said, the stock’s buoyant valuation is a hurdle in and of itself. The shares fetch nearly 17 times forward earnings, according to FactSet. That is well higher than their five-year average of 12.6 times. Aetna AET 0.73 % and Anthem, ANTM 1.25 % meanwhile, trade closer to 13 times.

At that kind of multiple, simply meeting expectations means UnitedHealth’s stock is only likely to tread water.

Write to Charley Grant at charles.grant@wsj.com


WSJ.com: Markets

About The Author