UnitedHealth Group, (UNH – Free United Health Group Stock Report) the nation's largest healthcare insurer, reported third-quarter results that met consensus revenue targets and beat earnings expectations by a handsome margin. Too, management raised its EPS guidance for 2017 and reiterated its outlook for 2018. On the heels of these positives, UNH stock rose to a fresh 52-week high north of the $204 mark, and has since retreated to a quotation just below that level. Still, the stock is up more than 5% on the news.
Revenues for the September period registered $50.32 billion, which was on par with our call, even with $1.6 billion less in consolidated revenues stemming from the company's withdrawals from the Affordable Care Act markets. Results also include the negative impact of the health insurance tax deferral. These setbacks were counterbalanced by a 17% rise in sales related to medical benefit products for seniors and Medicare offerings. The Optum branches, containing a pharmacy benefits manager (PBM), technological services, and doctor's services/clinics, continued to shine in the interim. In particular, the PBM arm, bolstered by the ongoing success of the Catamaran acquisition a couple of years ago, posted year-over-year revenue growth of 8%. Too, the Optum units maintain a customer base of 90 million consumers, up 9 million lives from the like-period of 2016.
Earnings for the three-month session equated to $2.66 a share, roughly a dime ahead of both our and Wall Street's estimates. The Optum segment gets much of the credit here, as double-digit annual earnings growth was on display across all product and service lines, no small feat for entities of this size. Elsewhere, the legacy healthcare business showed improved profitability as well, after eschewing the ACA-related markets where both this company and many of its peers had trouble managing costs of previously uninsured Americans with greater-than-anticipated healthcare needs. The company's medical cost ratio, or the percentage of premiums paid out for medical services, rose to 81.4% in the quarter, an uptick from the 80.3% on the books for the third quarter of last year, but still 100 basis points below the consensus target. With that, cost trends should remain favorable for the foreseeable future. Management does not seem overly concerned with President Trump's recent move to cut off subsidies to health insurance companies for low-income patients. As stated, UNH has made itself rather immune to the ACA changes because of the aforementioned exit. In fact, many pundits believe the President's move could be marginally positive for the company.
Looking ahead to our full-year 2017 numbers, we are maintaining our top-line estimate at $200.5 billion, and lifting our bottom-line figure by a dime to an even $10.00 a share, reflecting the outperformance in the third quarter. Additionally, new CEO David Wichmann, who took the helm in September, added commentary that put the 2018 earnings expectation at the high end of the anticipated range of the current market consensus, which now stands at $10.87. With that, we are leaving intact our $10.85 figure. Revenues next year should approach the $220 billion plateau.
Other news of late includes management being in negotiations to dramatically boost its international platform. Chilean health insurer Banmedica is the proposed target. If completed, a deal would expand United's business outside of the United States by 30%. This would give the company a third sizable segment after the domestic healthcare operations and Optum. Gains have been made since a foray into the Brazilian market a few years back, and we think piggybacking on this move is a wise undertaking. Separately, UNH is being sued by the Department of Justice, alleging that the company overcharged the government to insure individuals through its Medicare Advantage program. Earlier this month, one of these complaints was dismissed, but an amended complaint can still be filed per the judge's decision. We do not expect a major settlement coming on this front due to United's strong defense case. However, anytime the situation reaches the magnitude where the DOJ is involved, it adds a layer of risk to the investment profile.
From an investment perspective, we think those not already on board have missed the boat with regard to initiating a position here. These shares have been in rally mode for an extended period of time, and over that span both the appreciation potential and the yield have been rendered subpar versus their respective Value Line medians. The future looks bright for this blue chip, but long-term accounts will want to wait for a better entry point to present itself.
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.
