What happened
Shares of UnitedHealth Group (UNH 0.23%) fell on Friday, declining 2.7% as of 1:40 p.m. ET.
The stock was initially higher on the back of this morning's first-quarter earnings release, which showed a beat on revenue and adjusted earnings per share.
However, the stock turned sharply lower with the rest of the market on Friday, as perhaps its recent run-up into earnings already reflected anticipation of good news. Furthermore, Federal Reserve officials continue to hammer home the point that inflation remains too high, despite some recent better-than-expected readings. That outlook could spur the Fed to raise interest rates more than some expect, therefore hurting the value of higher-priced growth stocks like UnitedHealth.
So what
UnitedHealth's large, diverse business lines across health insurance, pharmacy, health data solutions, and care delivery is shining through today. In the first quarter, revenue grew 14.7% to $91.9 billion, and adjusted generally accepted accounting principles (non-GAAP) earnings per share grew 14% to $6.26. Both of those top- and bottom-line figures came in ahead of analyst estimates.
Also of note, UnitedHealth grew its customer base by 665,000 in the first quarter, reaching a level about 2 million greater than the first quarter of last year. The company also noted recent Medicaid contract wins in Indiana and Texas, which should continue to bolster growth this year.
Furthermore, management also raised its guidance for the year, from adjusted earnings between $24.40 to $24.90 to a new range of $24.50 to $25, compared with the consensus estimate of $24.93.
So with all these positives, why did the stock fall? Well, the general market was down today, especially higher-multiple stocks. Even with the company's raised guidance for 2023, UnitedHealth's stock trades at roughly a 21 P/E multiple to this year's projected earnings.
If the Federal Reserve continues to raise interest rates, that's a healthy valuation, even for a high-quality and somewhat defensive stock like UnitedHealth.
While the markets had risen over the past couple days as some overall inflation readings came in softer than expected, Fed officials have been pouring cold water on the idea that the past year's inflation scare is over.
Today, Fed governor Chris Waller noted in a speech that he actually doesn't think financial conditions are that tight, that the labor market remains very strong, and that core services inflation, which strips out moderating energy prices, is still too high for his liking. At a speech in Texas today, he noted, "Whether you measure inflation using the CPI or the Fed's preferred measure of personal consumption expenditures, it is still much too high, and so my job is not done."
So all in all, UnitedHealth beat expectations but only raised its guidance to where Wall Street analysts had already been projecting earnings. Meanwhile, the hopes of declining inflation and interest rates, which boosted higher-multiple growth and defensive names like UnitedHealth in recent days, seemed to reverse course today on the back of Waller's speech. So, it's no wonder that UnitedHealth gave back some gains.
Now what
As the largest health insurance and services company in the market, UnitedHealth remains a fine defensive pick for most investors. The company is growing nicely, returning cash to shareholders via a 1.25% dividend as well as share buybacks, and will likely maintain its profitability even in an economic downturn, since health insurance is an essential service.
Yet while UnitedHealth is a port in the storm for defensive investors, its upside may be capped in the near term, as its relatively high multiple may be hard to expand as long as interest rates remain high.
