Mizuho's Jared Holz talks UnitedHealth dropping on DOJ probe

Summary of UnitedHealth Stock Analysis and Healthcare Sector Outlook

Key Concepts:

• UnitedHealth (UNH) stock decline
• Department of Justice (DOJ) probe
• Bull case for UNH (long-term investment)
• Valuation multiples (P/E ratio)
• Medical Loss Ratios (MLR)
• Healthcare utilization trends
• Healthcare sector bottoming
• Tools and cross-med pays subsector

1. UnitedHealth Stock Decline and DOJ Probe:

• UnitedHealth (UNH) stock is down 55% from its all-time high in November.
• The company is dealing with a Department of Justice (DOJ) probe.
• The company claims it was unaware of the probe at the time of initial media reports.
• UNH proactively reached out to the DOJ to inquire about potential investigations.
• The official communication from the DOJ is relatively new, and the company is addressing it.

2. Bull Case for UnitedHealth:

• The bull case for UnitedHealth rests on a long-term investment horizon.
• The expectation is that most of the negative news is already priced in.
• The company is expected to work through the current challenges and improve its earnings story towards the end of the decade.
• Investing now is a bet that the situation will improve over time, not immediately.

3. Valuation and Earnings Expectations:

• Pre-COVID, UNH traded at a historically low multiple of 13x earnings.
• The current P/E ratio is around 11x, but this is likely to change.
• Analyst expectations for earnings per share (EPS) are being revised downwards.
• The consensus is that EPS will be south of $20 for the current year and slightly above $20 for the next year.
• Based on these revised estimates, the stock is trading at 15-17x earnings, which is not considered cheap.

4. Key Question: Drivers of Higher Healthcare Utilization:

• The primary concern is the factors driving higher healthcare utilization.
• The initial assumption of orthopedic or cardiovascular procedures being the main drivers may be incorrect.
• Potential drivers include cancer treatments (chemo, IO therapies), pharmaceuticals, and other unknown factors.
• The affected populations are shifting, initially commercial, now Medicare and Medicaid.
• There are many variables that need to be understood to determine the root cause.

5. Healthcare Sector Bottoming:

• Investors are questioning whether the healthcare sector has hit its bottom.
• The analyst believes that certain pockets of the sector have bottomed.
• Tools and cross-med pays subsectors have seen significant gains (e.g., up 50% at one point).
• Companies like Thermo Fisher are indicating that the first quarter was likely the worst of the year, with subsequent improvements expected.
• However, the managed care subsector, which includes companies like UnitedHealth, is still facing challenges.

6. Conclusion:

The future of UnitedHealth stock is uncertain due to the DOJ probe and concerns about rising healthcare utilization. While a long-term investment strategy might be viable, the stock is not currently considered cheap based on revised earnings estimates. The key question is identifying the drivers behind higher utilization rates, which are impacting the company's financial performance. While some areas of the broader healthcare sector show signs of recovery, managed care faces ongoing headwinds.