Shares of UnitedHealth Group (NYSE: UNH) have been jumping recently after the company posted some impressive quarterly results. For a company that’s been on the wrong side of analyst expectations for a while, it’s welcome news for frustrated investors, who have experienced significant losses over the past few years.
But investing is based on the long term, and how a company did during its most recent three-month period is not necessarily indicative of where it may be heading in the future. Is it a good idea to invest in UnitedHealth Group today, and has it done enough to prove that it’s a safe stock to own?
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A big problem for health insurance companies in recent years has been rising costs. Utilization rates are up, and that’s led to higher-than-typical costs. A key metric for UnitedHealth is the medical benefit ratio, which is how much it pays for medical expenses in relation to the premiums it collects. This past quarter, analysts expected the rate to be at 85.5%, and it came in at 83.9%, which was lower than what it was a year ago — 84.8%.
The reduced costs enabled UnitedHealth to post better-than-expected profits, as its adjusted earnings per share for the quarter were $7.23, well below expectations of $6.57. Its revenue also totaled $111.7 billion, which was higher than the $109.6 billion that Wall Street was estimating.
The big question, however, is whether UnitedHealth can build off these results and prove that the strong quarter wasn’t an anomaly. Poor performances in the past are a big reason why the stock has been an underwhelming buy. Last year, shares of UnitedHealth crashed by 35%.
Although UnitedHealth’s recent results were encouraging, investors may still want to tread cautiously here. There are, after all, investigations going on into its billing practices.
Senator Chuck Grassley of Iowa has been particularly worried about the company’s Medicare Advantage operations. Based on an investigation he launched, a report found that UnitedHealth has been using “aggressive strategies” to boost risk adjustment scores, which can lead to greater revenue.
If the government imposes restrictions or tighter regulations that impact the way UnitedHealth conducts its operations, that can have a drastic impact on the business, at a time when its financial position isn’t looking as strong as it once was. That’s why, while it may be tempting to jump on the bandwagon, I’d take a wait-and-see approach with the healthcare stock, as it still has a long way to go in proving that it’s a safe buy.
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