What to Understand About United Healthcare (UNH) and Bank of America (BAC) Earnings Results


At first glance, two high-profile, early earnings reports that came this morning were major disappointments, disasters even. Both United Healthcare (UNH) and Bank of America (BAC) are trading significantly lower in this morning’s premarket after their Q4 results fell short of traders’ expectations. The two stories are very different, but there is a common thread in that the issues that led to drops in the stock of both companies are quite specific, and neither tells us anything about the overall Q4 earnings picture.

In fact, UNH actually beat the consensus forecast on both the top and bottom lines, but the stock opened around 3% lower today, and that was actually pretty good considering there was an initial drop of nearly double that in the premarket. The problem was not how much they brought in or how much they made, but how much their underlying costs increased as they did it. What is known as the “medical care ratio” in the world of health insurers, the ratio of medical costs to revenue from premiums, rose to 85% from 82.8%.

Cynics might point out that that still leaves 15% of all premiums going to the company rather than to pay medical bills, or that UNH still took $5.46 billion out of the U.S. healthcare system in profit in one quarter, but for traders and investors, neither of those things really matter. What does is that the amount paid to providers and drug companies is increasing and, while premium increases have so far offset that, there is a limit to how much UNH or any insurer can raise rates.

That is particularly true in one area where UNH failed to meet expectations, Medicare Advantage. In fact, as multiple media stories earlier this year pointed out the problems with outsourcing Medicare to private companies in terms of the quality of coverage, UNH felt compelled to cut rates last year. I haven’t seen a breakdown of how much of their medical care ratio increase was down to also providing better coverage on Medicare Advantage plans, but the level of controversy around the subject suggests that it might account for a decent chunk of the miss on that metric.

The thing is, from the perspective of how this report impacts the future of the stock, changes in the quality of coverage and pricing offered by Medicare Advantage plans are not going away. The cat is out of the bag now and, particularly given that 2024 is a Presidential election year in America, it probably isn’t about to jump back in. UNH will still make money, of course, but their margins will inevitably be trimmed as political scrutiny increases, making this a drop on a top and bottom line beat that is fully justified.

Bank of America, on the other hand, missed on both EPS and revenue, so that stock opening a few percentage points lower should come as no surprise. As is often the case with bank earnings, there were a lot of complex charges and the like that muddied the picture. Ex-items, BAC recorded earnings per share of $0.70, beating the $0.53 forecast number, but some of the charges in the quarter can’t just be written off, so overall, the report was a disappointment.

However, unlike UNH, the things that caused BAC to trade lower are mostly temporary by nature. The biggest contributor to the miss was a weak trading quarter, but as anyone who has ever worked in the industry knows, past performance is not an indicator of future results. A trading profit miss can come about from one bad call or a series of unfortunate events but, either way, the new quarter starts afresh. So, overall, while BAC’s Q4 was definitely disappointing, the drop in the stock looks more like a buying opportunity than a harbinger of things to come.

UNH and BAC, two of the biggest names to report so far in this earnings season, both missed expectations for their earnings. Given the company specific reasons for the misses, neither has any bearing on the overall market, but while UNH’s problems look set to continue and will involve an adjustment to expectations going forward, BAC’s are more of a one off and the stock can easily recover lost ground.b

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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