Shares of the nation's largest health insurer UnitedHealth Group (UNH - Free United HealthGroup Stock Report) were down a bit in recent market action. The modest decline was in response to the company announcing second-quarter financials that resulted in earnings surpassing consensus expectations and sales coming in on par with what most were looking for. Based on past performance, the market was likely expecting a top-line beat, and some investors probably sold when that did not materialize. Too, the uncertainty in Washington surrounding the future of healthcare policies here in America might have prompted some parties to take profits at this time; UNH stock is up 32% in the trailing 12-month period.
For the latest three-month window, revenues tallied $50.05 billion, up handsomely on a year-over-year basis (7%), and on par with our earlier estimate. The figure was slowed by withdrawals from the Affordable Care Act markets, combined with a health insurance tax deferral stemming from that legislation. Digging deeper, revenue from Medicare business was up 17%, to $16.7 billion. Sales at the Optum units, which manage drug benefits and offer healthcare data analytics, rose about 10%, to $22.67 billion. More specifically, Optum Rx, the company's pharmacy benefits arm, saw revenue growth just north of 5%, to $15.8 billion. The Optum segments continue to post impressive gains during a time of sweeping reform in the healthcare industry. Truth be told, however, these statistics are not as robust as in quarters past, which is likely contributing to the somewhat negative initial reaction this quarterly report received.
Share net for the June interim registered $2.46, eclipsing the average estimate, which was level with our $2.37 call, and up significantly from the $1.96 posted in the like quarter of 2016. The medical cost ratio, or the amount an insurer spends on medical claims compared to the insurance premiums brought in, climbed 20 basis points year over year. Normally, any upticks here can be troublesome, but in this situation UNH actually executed quite well. An improved business mix helped offset what was a 150-basis-point hike stemming from the health insurance tax deferral. Management's decision to exit all ACA-related business has made this vital metric easier to control of late, which lends a measure of improved predictability to our near-term EPS estimates.
Legislation overhang remains a concern, albeit to a lesser extent for UnitedHealth then some other players in the industry. A second attempt to pass a fresh healthcare bill collapsed earlier this week and politicians continue to negotiate whether there will be a full ACA repeal, or whether bipartisanship will find some common ground. UNH lost money on the ACA when higher-cost members undermined the system, so the company took its business elsewhere. Still, as a bellwether for the medical insurance field, these decisions will have ramifications on its operating environment going forward, though the effects on much of its competition should be more noticeable.
For the balance of 2017, management has lifted its guidance range for earnings to a bracket of $9.75 a share to $9.90 per share. In response, we have added a nickel to our call, which now stands at $9.90. The full-year revenue target was maintained at $200 billion, in line with what we were already estimating.
From an investment standpoint, we think conservative accounts are best to add these blue-chip shares for their dividend. Recent price points are well within our 3- to 5-year Target Price Range, thus long-term appreciation potential is subpar. As noted, the quotation has soared over the past 12 months, meaning those not already on board have likely missed the boat.
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).
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
