Undervalued stocks are set for a rapid recovery

UnitedHealth Group NYSE:UNH The first quarter results were better than expected for two reasons: First, the stock price is now recovering from long-term lows and into deep value territory with plenty of upside potential. Second, UnitedHealth analysts see an advance of more than 20% from the current consensus, and the consensus could rise because it is cautious.

The consensus estimate softened ahead of the first quarter release as concerns turned out to be extreme. Now analysts will have to rework their estimates and probably revise price targets to make them higher. As the results support the market and the stock has value and yield, bullish momentum could easily push this stock price into the high end of analysts’ range. This would bring the trend back to the line that began in 2020.

The impact of UnitedHealth’s cyberattacks is less than feared

UnitedHealth Group’s results are strong thanks to underlying business strength and the lower-than-expected impact of the recent cyberattack. The company posted net revenue of $99.79 billion, an 8.6% gain over last year, beating forecasts by 50 basis points. While 50 basis points is a slim margin, the results could have been much worse given the scale of the attack. Optum grew the fastest in the segment, at 13%, and was offset by slower growth in its core UnitedHealth segment. UnitedHealth’s growth has been driven primarily by increasing the number of customers served.

GAAP margin was profoundly affected by the sale of operations in Brazil and the cyber attack. The impact of the Brazilian operations is primarily non-monetary and related to currency translation losses; the impact of the cyber attack is quantified at 74 cents per share, of which 49 cents in direct response interventions and 25 cents in business interruptions.

After adjusting for the effects of Brazil and direct response, but not business disruption, net operating margin is flat compared to last year and EPS is above consensus. The $6.91 price surpassed the consensus reported by Marketbeat by 29 cents and is compounded by better guidance. UnitedHealth has issued favorable guidance. The company expects adjusted earnings of $27.50 to $28 versus the analyst consensus of $27.53.

UnitedHealth’s cash flow and capital returns are healthy

The cyberattack had a negative impact on cash flow in the first quarter and will continue to do so this year, but the effects are limited, lower than expected and will diminish as the current quarter closes. Regardless, the company’s cash flow in the first quarter was sufficient to weather the storm. Balance sheet highlights include an increase in cash offset by an increase in debt and liabilities and a single-digit decline in equity. The net result is leverage close to 2x cash and 0.7x equity capital, both of strong quality, allowing for dividends and share buybacks.

The dividend is higher than the general market average, with a yield of approximately 1.7%. The payout ratio is low at 30% and is exacerbated by share buybacks. Buybacks in the first quarter led the average adjusted share count to fall 1.4% and are expected to continue this year. An increase in distribution is also likely. UNH has increased for 14 consecutive years and is on track to make its next increase when it declares payment.

UnitedHealth Group confirms the fund

Price action in the UnitedHealth group rose more than 5% after the release to confirm a low at $450. The market is in recovery mode and is likely to move higher. There is some resistance at the $480 level and the 30 day EMA in the short term, but it may not last long. A break above that level could take the market up to $500 or $520, where resistance could be substantial.

The long-term prospects are good. UnitedHealth is expected to resume its long-term uptrend from there due to insurance industry trends, margins and capital returns. The question is whether the trend will trend moderately higher from this level or reach the upper limit of the analyst range and realign with a previous trend.

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