UnitedHealth Group, (UNH – Free UnitedHealth Group Stock Report) the nation's largest medical insurer and a Dow-30 component, has reported its financials for the second quarter. Revenues and earnings for the three-month period bested both our and Wall Street's expectations, but the investment community has gotten used to UNH accomplishing that feat. With that, it looks like United has become a victim of its own success this morning. After digging a bit deeper, premiums were a hair below consensus, and this sent the shares down as much as 4% in early trading today.
Revenues for the June interim clocked in at $56.1 billion, just ahead of our $56.0 billion call, and up more than 12% on a year-over-year basis. Premiums rose by the same amount, versus last year's comparison, to $44.46 billion, but the number that had been floated for that metric was $44.59 billion. United has made a habit of beating all expected figures and though this miss is minuscule, investors that have been riding the stock all through 2018's rise in price likely took some profits on the first sign of possible weakness, however small it may be. Separately, at the legacy UnitedHealthcare arm, the improved business performance was driven by a pricing increase, coupled with consumer and revenue membership mix growth. On the Optum side of the portfolio, sales rose more than 9% year over year, to $24.7 billion, with each of the three segments posting double-digit gains when compared to the 2017 figures.
From an earnings perspective, adjusted share net registered $3.14, versus the average call on Wall Street of $3.04 and our slightly more aggressive expectation of $3.10. Net margins rose to 5.2% from 4.6%, and the medical cost ratio reading was 81.9%. This figure was a 30-basis-point improvement when placed up against 2017's like-period number, but was up from the 81.4% during the first quarter of this year. This jump was due to the return of the health insurance tax, which more than offset a positive business mix and the trimming of the prior year's reserve development amount. While the return of the tax was not a surprise, investors probably were not enthused by the sequential rise in the medical cost ratio, and this may be another reason why investors are taking some profits off the table today.
Elsewhere, an area that deserves highlighting is cash flow. Specifically, cash flows from operations soared to $4 billion in the period, versus the previous-year level of $2.2 billion. Also, the amount of people that the company is serving increased just short of 5% year over year, to 48.8 million individuals as of the end of June. One last bookkeeping note, buyback activity remains strong, with $500 million of share repurchases executed during the second quarter.
For the balance of 2018, management boosted its bottom-line guidance range by a dime on both ends. The new bracket stretches from $12.50 to $12.75 a share. In turn, we are lifting our full-year call by a dime, which brings it to the apex of that range. In terms of revenues, we are maintaining our top-line figure for 2018 at $225 billion.
In terms of investment advice, we think this morning's dip in price is an overreaction to what in all essence was a fairly strong quarter. Still, we understand that many accounts have been riding the UNH wave for some time now, to the tune of sizable gains, and wanted to take some profits. The stock had been up 18% year-to-date through yesterday, versus the Dow's annual rise of below 2% thus far in 2018. Today's decline in quotation provides a more-suitable entry point for those looking for blue chip exposure in the medical services field. The dividend also is above average and supported by rock-solid financials.
We continue to think UnitedHealth is the cream of the crop and deserves a handsome premium versus its peers, who at this time are making all efforts possible to mimic this company's business model. CVS Health and Aetna are in the latter stages of a potential merger, Cigna/Express Scripts are working on a tie-up, and Amazon just bought online pharmacy PillPack in an effort to get a foothold in the $300 billion prescription drug industry. Meanwhile, UNH has been combining managed care and prescription benefits for years now at unprecedented success levels.
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
