Shares of UnitedHealth Group, (UNH – Free UnitedHealth Group Stock Report) the nation's largest healthcare provider and a Dow-30 member, were up more than 3% after the company posted first-quarter results that topped expectations in terms of both revenues and earnings. Too, management upped its guidance for the full year.
The top line for the three-month period clocked in at $55.2 billion, ahead of both our and Wall Street's consensus estimate of $54.9 billion and up handsomely from the year-earlier mark. The revenue strength was broad based, with the legacy healthcare business performing admirably and the high flying Optum branches continuing to flex their muscles. Breaking it down further, UnitedHealthcare's Medicare & retirement segment grew revenues by over 14% from the like period in 2017, to $18.9 billion. The community and state side of the coin displayed a 19% annual gain, reflecting stout 12-month membership growth with an increasing mix of individuals with higher clinical needs. In total, Optum revenues jumped more than 11% year over year, to $23.6 billion.
On the earnings line, adjusted share net registered $3.04 versus our $2.91 call. Net income soared more than 30% against last year's first-quarter figure after making allowances for some one-time impacts. A favorable medical cost reserve development aided in this regard, as that $290 million helped to offset the rising operating costs brought about by the restart of the health insurance tax following a past suspension. Lower corporate income taxes also helped boost profitability. In that vein, management forecasted a tax rate of 21.5% for 2018.
Elsewhere, the acquisition of DaVita's (DVA) medical group may take a bit longer than expected. Reports are stating that regulators have requested additional information before signing off on the pact. Sometimes, a situation of this nature means very little, but some extra digging is never a good thing. Many pundits and shareholders may not even be overly concerned with any delays, as the deal was viewed with a large amount if disdain initially, particularly due to the price tag. UNH is paying $5 billion for a division that won't even generate $100 million in operating income this year. We are taking a wait-and-see approach and believe the marriage will be consummated without any further snags. Still, we can get on board with the train of thought that this was a knee-jerk reaction to bulk up in the face of the purchase of Aetna (AET) by CVS Health (CVS). Clearly, that purchase was in an effort to emulate United's business model. Regardless, leadership here has proven its acumen at bringing assets under the UNH umbrella and making them thrive, so some patience is needed here.
Management has increased its bottom-line guidance for 2018. On the heels of the impressive first-quarter showing, a new range for annual EPS is being set at $12.40 to $12.65. These numbers represent a bump up of a dime on the low end and a nickel at the apex. Given the strength inherent in the first quarter, we are raising our full-year earnings call by $0.15, to $12.65 a share. Our top-line estimate remains on par with leadership's view of around $245 billion in revenues for the year.
From an investment perspective, we think anyone looking to get in for the long haul has missed the boat. Appreciation potential out to 2021-2023 is below average, and the dividend is not large enough in terms of yield to be entered into the equation and make it a worthwhile total return play. That said, the equity likely has some room to run near term, barring any unforeseen occurrences. Still, it is hard to muster great enthusiasm for this blue chip at its recently lofty valuation.
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.
