To The Moon

$UnitedHealth(UNH)$

UnitedHealth Group (NYSE: UNH) released its second-quarter earnings, and the market reacted swiftly—shares fell more than 5% on the day. While there are both encouraging and concerning aspects to the report, this latest development reflects a pivotal moment for long-term investors. Today, I’ll walk you through what surprised me, what didn’t, and why I opted not to buy the dip—despite holding a position purchased at $420 per share, now down roughly 37% from that level.

Although my UNH stake remains up 31% overall across the broader portfolio, I refrained from averaging down today. Here's why.

A Massive EPS Miss Overshadows Revenue Beat

The company reported a significant earnings miss, with adjusted EPS coming in at $4.08, well below the $4.48 expected. While top-line revenue grew and marginally beat expectations, the earnings miss is indicative of deeper challenges.

Most notably, the medical loss ratio (MLR)—a key industry metric—climbed to 89.4%, up from 85.1% a year prior. This steep increase underscores a painful reality: healthcare costs are rising significantly faster than the premiums UnitedHealth is collecting. Put plainly, UNH is paying out more in claims than anticipated, and margins are eroding as a result.

To fix this imbalance, the company will have no choice but to raise premiums. It’s an industry-wide issue—not one unique to UnitedHealth. With all major insurers grappling with similar cost pressures, the likelihood of policyholders switching to cheaper competitors is minimal. Rate hikes across the board are inevitable.

Management admitted as much, stating:

“The primary driver of UnitedHealthcare’s earnings shortfall for 2025 is that our pricing assumptions were well short of our actual medical cost. Our current view for 2025 reflects $6.5 billion more in medical costs than initially anticipated.”

This isn’t a small miss—it’s an extraordinary $6.5 billion deviation.

Price Increases and Market Exits: A Dual Strategy

The word “pricing” appeared 26 times in UnitedHealth’s earnings call—clearly signaling the centrality of premium adjustments in its strategy moving forward. But pricing alone won’t solve the profitability challenge.

The company also disclosed plans to exit certain markets where profit recovery appears unviable, specifically plans that currently serve over 600,000 members. These were geographies and risk pools previously abandoned by peers like Aetna and others—markets UNH had re-entered in hopes of capturing share. Today, management acknowledges those decisions were likely too aggressive and is reversing course.

This will inevitably have a modest negative impact on revenues in 2026, but it represents a necessary pivot toward margin-driven growth and operational discipline.

Margin Recovery Tied to Member Tenure

One fascinating insight from the earnings call involves the profitability dynamics tied to member tenure. The company revealed that longer-tenured members generate significantly better margins under value-based care models. In fact:

• Cohorts from 2021 and earlier operate at 8%+ margins.

• Cohorts from 2022–2023 show 2% margins.

• Cohorts from 2024–2025 currently operate at negative margins.

Why? Patients who remain longer within UNH’s care system tend to receive proactive and preventive care, reducing high-cost interventions over time. This translates into both better health outcomes for members and stronger unit economics for the insurer.

Antitrust Investigation Remains a Wild Card

A lingering concern is the Department of Justice’s antitrust investigation. While UnitedHealth has faced similar legal scrutiny in the past—and prevailed—investors should remain cautious. Management emphasized improvements in auditing, clinical policy, and payments integrity, and committed to safeguarding both customers and patients from excess costs.

Still, until a final judgment is reached, this remains an open risk factor.

2027: The New Recovery Timeline

Perhaps the most disappointing takeaway from the call was the shift in the timeline for recovery. Previously, investors had pinned hopes on a meaningful rebound in 2026. That timeline has now shifted.

While management still expects moderate earnings growth in 2026 (largely due to a depressed 2025 base), they now characterize 2027 as the true inflection point. As stated during the call:

“Looking ahead to 2026, we anticipate solid but moderate earnings growth. But our earnings growth outlook strengthens considerably in 2027 and continues upward from there.”

This signals to investors that a full earnings normalization will take at least 18–24 more months. As a result, I’m taking a more measured approach to averaging down. While 2025 looks like a bottom in terms of EPS, I no longer expect meaningful upside before the second half of 2026.

Valuation: Worst-Case Scenario Already Priced In?

The company has now guided to $14.65 in EPS for 2025. Based on a share price around $268, this implies a forward P/E ratio of approximately 16.5x—well above the earlier estimate of 13x that had assumed stronger profitability.

Is this valuation justified? Perhaps surprisingly, yes.

This is arguably a worst-case scenario. If UNH beats even modestly against these subdued expectations—as seems likely—2025 will serve as a trough. And if the company reverts to its historic EPS growth trajectory of 12–15% annually, 2026 and 2027 forward multiples could drop into the low-teens or high-single digits.

Indeed, management reaffirmed their long-term EPS CAGR target of 12–14%, noting:

“We expect to pace steadily back to low double-digit earnings growth, with the long-term growth framework intact.”

They also highlighted the strategic use of share buybacks to return capital. A substantial buyback authorization could be announced as early as next quarter—a move that has historically coincided with price troughs in similar large-cap names.

Final Verdict: Opportunity Amid Headwinds?

So where does this leave us?

We are witnessing a classic kitchen-sink quarter: guidance reset, market exits, pricing recalibration, and public transparency about long-term recovery. And while the 2027 timeline may delay returns, the foundation for a meaningful recovery is being laid now.

At 16.5x earnings based on worst-case forward guidance, UNH is not a bargain—but neither is it overpriced. If earnings normalize and long-term growth resumes in 2027, today’s valuation could ultimately prove attractive.

My Position: Waiting for a Better Entry Point

The timeline shift to 2027 warrants a more patient strategy. I may add on further weakness, particularly if shares approach $250 or if the company surprises with a significant buyback initiative.

For now, I believe UNH is closer to the end of its downside narrative than the beginning. But I prefer to wait for additional catalysts before recommitting more capital.

Key Takeaways:

1. Q2 EPS miss and elevated medical loss ratio underscore near-term profitability pressures.

2. Company plans to raise premiums and exit unprofitable markets affecting 600,000+ members.

3. Longer-tenured members are far more profitable, improving as they stay within UNH's care network.

4. Management now points to 2027 as the true recovery year, shifting the investment timeline.

5. At 16.5x earnings, UNH trades at fair value for a worst-case scenario, with potential upside if EPS guidance proves conservative.

6. A major buyback program could be a near-term catalyst.

7. DOJ investigation remains a wildcard, but past outcomes have favored UNH.

Verdict – July 2025: Hold with Buy Below $250 Investors seeking stable income and longer-term recovery potential may find this level reasonable. However, patience is warranted, and better entry points may still emerge.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

@Daily_Discussion @TigerPM @TigerObserver @Tiger_comments @TigerClub