UnitedHealth Group (UNH-NYSE, $523.30) Posts Such a Strong Result that Only Its Inclusion in the DJIA Prevents the Shares From Surpassing a Record High.

Consolidated operating margins at UNH touched 9.2% for the quarter.

Consolidated EBITDA margins surpassed 10.2% for the quarter.

At the present rates of growth and factoring in the new acquisition that closed last month, the Optum division stands to surpass the HMO business as the primary earnings driver in 2023.

The results speak for themselves. Once again, there were no weak spots, no disappointments, merely impressive results posted and the likelihood of more to come now that Change Healthcare has been added to the stable of revenue generating businesses.

UnitedHealth is a core component of the Dow Jones Industrial Average. As such, it both influences the average via its inclusion, and is also influenced by market capitalization movements among the other components within the index.

The composition of the DJIA represents the primary headwind for UnitedHealth, rather than any specific economic challenge.

The YTD stock market pressures, due to inflationary negative impacts reported (and yet to be reported) by most of the other component corporations making up the DJIA, have more than offset the strong fiscal results reported by UNH in the first 9 months of this year.

This quarter, I believe that other DJIA components, with large international businesses, will be negatively impacted by forex as well as inflation. It is these companies in aggregate that are serving to hold UNH down in isolation from achieving a stronger stock market valuation. The impressive results posted by UNH, year-to-date, are being hamstrung, or hobbled, by participation in an index which includes such sad sacks as 3M, Honeywell, IBM, Intel, Cisco, Verizon and Walgreens, to name just a few.

UnitedHealth represents an absolutely world class company stuck in an index with the bulk of constituents being ordinary, to downright awful, businesses.

Margins are growing, which supports a long thesis. Sector sentiment validates a long thesis. The current issue is “guilt by association“; being one of the best corporations in an index full of bad bets makes for a challenging near-term stock price forecast when market ownership is concentrated in passive ETF funds and closet index funds masquerading as active management.

No matter: in the longer term, as mentioned in a prior blog article, so long as operating and EBITDA margins are moving in the right direction, the share price will most likely follow, maybe not sooner, but almost inevitably later.

It is not good enough for a rising earnings result, in isolation, to produce share price growth; but ALL the critical aspects of a financial result needed to produce long-term outperformance are present in the current UNH fiscal report and guidance.


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