UnitedHealth Group, (UNH – Free UnitedHealth Group Stock Report) the nation's largest health insurer and a member of the Dow 30, has reported third-quarter results that beat expectations on both the top and bottom lines. The stock was up more than 4% on the news and the shares are again trading near their all-time highs.
Revenues for the quarter added up to $56.56 billion, which edged our call of $56.40 billion, an amount that was in line with the consensus. At the legacy healthcare business, the top line advanced 13% from last year's showing. Growth was driven by an increased number of people served, and membership gains in higher acuity programs. In fact, UNH had 2.8 million more consumers on its client roster as opposed to just one year ago. The Optum branches also posted annual growth north of 11%, as its plethora of services in the medical field, namely IT, consulting, pharmacy benefits, remained in high demand.
Net income for the three-month period rose 28% year over year, to $3.19 billion. On an adjusted basis, that equates to $3.41 a share, or roughly a dime higher than both we and Wall Street were looking for. The medical cost ratio, or the percentage of premiums paid out for medical services, was 81.0% in the period, a handsome improvement from the 81.4% posted in the third quarter of 2017. Also, the company repurchased 1.9 million shares during the quarter, bringing the year-to-date tally through September to 15.7 shares.
UnitedHealth revised its 2018 financial outlook on the strength of the third-quarter numbers. The company now expects adjusted earnings per share to reach the 12.80 mark. The previous bracket provided stretched from $12.50 to $12.75. Our call had been $12.70, but we are lifting that amount by a dime at this time, to $12.80. A bit of upside exists to this figure as well, as UNH leadership has been known to guide conservatively and then surpass that level. Separately, we are adding $400 million to our full-year 2018 top-line expectation, which is now rounded out to $225.75 billion. Such a level implies annual revenue growth of more than 12%.
From an investment perspective, we are not overly enthused about UNH's long-term prospects, given the fact it is once again trading around the $270-a-share level. Such a lofty quotation minimizes capital appreciation out to 2021-2023, and it also brings the dividend yield to around 1.3%, notably lower than the Value Line average of 2.0%. For the near term, however, we think there may well still be some juice left to squeeze out of this high-quality (Safety: 1) selection. UNH is the premier blue chip offering in the medical services field. At a time where other entities are combining forces (CVS and Aetna come to mind) to make a run at some of its business units, the company is staying in its lane and reducing its cost structure. Too, each of its arms are performing admirably and we see no reason why that would change in the coming quarters. Therefore, we think that UNH's premium valuation versus its peers is warranted.
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 four business segments: UnitedHealthcare (network-based health care benefits), Optum Health, OptumInsight, and OptumRx (information and technology-based health services, consulting, and PBM).
- Erik M. Manning
