UnitedHealth Group Rallies Despite Continued Cyberattack Cost Pressures. Is It Too Late to Buy the Stock?

Shares of UnitedHealth Group (NYSE: UNH) were rallying despite a past cyberattack on the company's Change Healthcare business continuing to affect the company's results. But with investors now seemingly willing to look past the continuing cost to its business, is now a good opportunity to buy the stock?

Let's look at the company's second-quarter results, as well as UnitedHealth's prospects and valuation to determine whether or not it is too late for investors to jump into the stock.

A cyberattack weighs on profitability

One of the big headlines to come out of UnitedHealth's second-quarter earnings was the ongoing effect that the cyberattack at Change Healthcare was having on its business. The attack reduced its earnings per share (EPS) by $0.92 in the quarter, with $0.64 coming from restoring Change's clearinghouse platform and increased medical care expenditures and $0.28 from business disruptions.

The company said that, thus far, it has provided $9 billion in interest-free loans and advance funding to its clients affected by the breach.

UnitedHealth also raised its forecast for how much the cyberattack would hurt its business for the full year. It now expects the total reduction in its EPS to fall between $1.90 to $2.05, up from a prior outlook of $1.15 to $1.35.

Direct-response costs are projected to be between $1.30 to $1.35 per share, up from a previous expectation of $0.85 to $0.95 per share, while the cost from business disruption is expected to be between $0.30 to $0.40 per share.

Source: Company filings.

Revenue rose over 6% to $98.9 billion, with its namesake healthcare benefit segment growing revenue 5% to $73.9 billion, and revenue in its Optum health services businesses jumping nearly 12% to $62.9 billion. Note that UnitedHealth is an Optum customer, so there is about $37.9 billion in revenue that gets removed from its total consolidated revenue.

Adjusted EPS for the quarter, excluding the cyberattack and the planned exit of its South American business, came in at $6.80, up from $6.14 a year ago. The company also maintained its full-year guidance for adjusted EPS of between $27.50 to $28. It is looking for between 13% to 16% EPS growth in the long term.

Image source: Getty Images.

Medical care ratio pressures

Its medical care ratio (MCR), which is its medical expenses paid divided by its insurance premiums collected, was 85.1%, up from 83.2%, and was raised by 65 basis points related to the cyberattack and South American regulatory actions. The lower the ratio, the better, although health insurance companies are required by the Affordable Care Act to spend at least 80% of premiums on medical care or else return the excess to its customers for small plans and 85% for large plans. MCR can also be referred to as medical loss ratio (MLR) or medical benefit ratio (MBR).

The company said some of the MCR pressure in the quarter came from member mix within Medicare Advantage and dual special-needs plans, timing mismatches between Medicaid and state rate updates, and an upshift in provider coding intensity.

These issues can all lead to the company paying out more in medical claims in a given period. For example, adding older members could lead to more medical claim payouts, while some medical procedure codes have higher insurance payouts than others.

However, management reiterated that adjusted MCR for the year would come in between its prior guided range, albeit toward the upside. The company said the shift in membership was due to benefit designs and was largely expected, while it is addressing the coding activity, which it said was due to the number care waivers it did during the cyberattack disruption.

Meanwhile, it expects the Medicare timing mismatch to subside as the year progresses.

Its healthcare benefits business has grown by 2.3 million members year to date to 29.6 million members.

Within its Optum business, both Optum Rx and Optum Health were strong, with revenue growth of 13% to $32 billion and $27 billion, respectively. The company said it has brought on a record number of Optum Rx customers this year, as customers look to reduce drug costs.

Overall, the company posted solid results outside of the cyberattack. Optum is performing well, and the company continues to add members to its managed care organization (MCO) business. Its MCR ratio was a bit high, but its guidance shows that current pressures should begin to ease.

Attractive Valuation

From a valuation perspective, the stock trades toward the higher valuation of its peers with a forward price-to-earnings (P/E) ratio of just under 20. However, given its projected 13% to 16% long-term earnings growth and its higher-growth Optum business, the premium appears well deserved. Meanwhile, its forward P/E valuation is toward the lower end of the ratio it has traded at over the past five years, so there is potential for its multiple to increase.

HUM PE ratio (forward), data by YCharts .

Meanwhile, its forward P/E valuation is toward the lower end of the ratio it has traded at over the past five years. This shows that there is potential for its multiple to increase, especially as its results start to improve and it moves past the impacts of the cyberattack.

UNH PE ratio data by YCharts .

Overall, UnitedHealth appears to be getting past its issues from both the cyberattack and MCR pressures. Expectations going into the quarter were low, and the company was able to jump a low bar and set itself up to perform better.

Its Optum business is a differentiator in the space, and the company appears to have strong growth prospects. As such, this healthcare stock looks like a solid option for investors over the long run.

Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool recommends UnitedHealth Group. The Motley Fool has a disclosure policy .