UnitedHealth Group (UNH - Free UnitedHealth Stock Report), the nation's largest health insurance company and a Dow-30 member, has reported fourth-quarter results for 2016. The numbers bested both our and Wall Street's expectations from a top- and bottom-line perspective. The shares were initially up in early trading on the news, but have since retreated and are roughly 1% lower as of this writing. Some profit taking could be responsible.
Revenues for the three-month period clocked in at $47.52 billion, beating the consensus, which was around $46.8 billion. That figure was a 9% increase on a year-over-year basis, with growth broad-based in nature. The Optum businesses, made up of pharmacy benefits management, technology services, and clinics/doctor's offices continues to drive the lion's share of growth. Here, demand for UNH's various offerings has soared in the years since the Affordable Care Act was passed. The healthcare market's overhaul and reform has been a boon, as companies turn to United for a bevy of services that are both needed and trim expenses. But, Optum is not the only unit on the rise. The company's legacy insurance arm, UnitedHealthcare, had a strong quarter, as well. Initial troubles stemming from the ACA are now drifting into the rearview mirror, and even better showings are likely for 2017. Still, large losses from ACA-related operations were on the books last year, likely to the tune of about $850 million. Investors should not be overly concerned about this matter though. For starters, the needed adjustments have been made to curtail these losses, and this portion of the portfolio is only a small slice anyway.
Looking at the bottom line, adjusted earnings came in at $2.11 per share, a nickel greater than what we were looking for and ahead of the $2.07 consensus on the Street. This figure looks particularly impressive when placed against the 2015 fourth-quarter number of $1.26. At that time, ACA setbacks were mounting. For the most recent December quarter, earnings at the healthcare branch soared 79%. Heading into 2017, participation in the public exchanges has been scaled back even further, which is an ideal position given the likelihood of increased uncertainty surrounding the possible repeal of the ACA as has been speculated by the Republicans in Congress and President-elect Donald Trump. While many of its competitors have loftier exposure to these markets, UNH should not have to deal with much of the potential disruption lurking on the horizon.
A deal made earlier this month will enhance Optum's capabilities. Management has agreed to buy Surgical Care Affiliates (SCAI) for $2.3 billion. This entity has 3,000 physicians and 205 surgical facilities, and will be tucked into the health services branch. Combined, the network should now boast 20,000 doctors and have hundreds of locations. Pacts of this nature display a want to delve deeper into the immense potential of the Optum segments. Yes, it was the ACA that really got operations on an upturn, but overall it is the uncertainty/changes that goes on in the healthcare arena that brings in a large amount of new clients. We envision such a scenario developing as 2017 progresses. Health insurance will remain the primary revenue generator, but Optum should be right on its heels.
Management also upped its outlook for 2017. Originally, the bar had been placed at revenues of $196.5 billion and share net of $9.15. Now, we are boosting our expectation to get in line with the updated guidance provided. Our new revenue call is $198.7 billion, which would translate to earnings of $9.60 a share. That EPS amount is at the apex of the bracket announced with today's earnings news ($9.30 to $9.60).
From an investment perspective, we think UNH stock is a fine cornerstone for any and all portfolios, assuming one is already vested. That said, the entry point at this time is not ideal. The share price has gotten a bit ahead of itself and we are not advising this selection for either momentum accounts or for those with a long-term bent. Too, the dividend is growing rapidly and is well supported by strong financial. However, it is below the Value Line median so income-minded investors should look elsewhere for now, as well.
About The Company: UnitedHealth Group is a diversified health and wellbeing company dedicated to helping people live healthier lives and helping make the health system work better for everyone.. It offers a broad spectrum of products and services through two business segments: UnitedHealthcare (network-based health care benefits) and Optum (information and technology-based health services). - Erik M. Manning
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
