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Dow-30 Earnings: UnitedHealth Group - Third Quarter 2013
UnitedHealth Group (UNH - Free UnitedHealth Stock Report), the United States' largest health insurer, has reported September-period results that were in line with consensus targets, but did not please the investment community. These shares had been trading higher of late, up more than 30% for the full year to a 52-week high just shy of $76 a share. But they fell more than 5% during the first hours after the report’s release, as the bar for outperformance has been set high for this Dow-30 component. Furthermore, after a continuous string of strong showings, investors may well be looking to take some profits heading into a tumultuous period for the Medical Services Industry with the onset of significant reforms already under way.
Revenues came in just above $30.6 billion, but a hair shy of our $30.8 billion call. This figure was still a 12% year-over-year increase and any shortfall is understandable because management has been saying for some time that government reimbursement levels were likely to come down some. Too, leftover insurance claims, which allow UNH to release money held in reserve, tallied $290 million, versus $390 million in last year's third quarter. The lower figure basically means that claims came in much closer to what the insurer expected. This could be a sign that utilization is picking up. For several linked quarters, customers have eschewed doctor's visits, and United has been able to pocket those premiums. Any reversal in this trend will not be beneficial to the company for the balance of 2013. We think it is still too early to make a call on that front, however. Still, we will be dropping our full-year revenue target slightly, from $122.6 billion, to $122.0 billion.
On the earnings line, net income advanced 1% from the same period in 2012, to $1.57 billion, which equates to share net of $1.53, one penny ahead of what both we and Wall Street were estimating. Medical costs, which are far and away the insurer's largest layout, rose 13% in the interim, to $22 billion, as cuts in Medicare Advantage funding took a bite out of profitability. For the full year, management upped the bottom portion of its guidance range, but failed to boost the overall target for the first time in many years. UNH is known for employing such a tactic, and we believe that when investors saw that this was not the case in this earnings release, they may have chosen to sell. Regardless, the new per-share range provided is $5.40 to $5.50, and our sum sits at the apex of this spread. We are still apt to believe the total may come in a penny or two ahead of this call given the aforementioned penchant of UNH to set the bar for itself at scalable levels.
On a side note, although health insurance is UNH's bread and butter, we feel it necessary to highlight the success of the Optum branch. Prospects for this consulting arm are lofty, as the medical field wades into the waters of reform brought on by the Affordable Care Act. Information technology enhancements and pharmacy benefit management are two of Optum's specialties, and the number of potential clients in these fields should soar in the coming years. The early stages of this boom are already beginning to materialize; revenues in the September interim climbed 33%, to $9.6 billion. Any prospective investors on the fence about UNH should take a closer look at these operations.
Touching a bit more on the reform, we like the stance that UNH is taking early on. The alterations to our healthcare system call for healthcare exchanges to be set up for individuals and small businesses. United will only be participating in a limited number of these markets. Still, the company's employee-based business will be evolving, nonetheless. Corporations will be further shifting how they pay medical benefits. Workers' deductibles will be ratcheted up, and some firms will even be experimenting with sending employees to the exchanges to buy their plans.
This might lead some to believe that membership could become a concern for United, but we do not see any problems on the horizon. The company boasted 45.3 million lives under its enrollment as of September 30th. Upticks among individuals in government-run programs have been evident lately. Medicaid for the poor and Medicare Advantage for the elderly are two prime examples of this. And a timely acquisition in Brazil is helping boost international numbers as well. Yes, too much government exposure is not ideal, as it is generally speaking a lower-margined endeavor. However, 5.7 million people, or 20% of the total enrollment in employee or individual plans, were in high-deductible plans.
From an investment perspective, we think this blue chip is appealing from a number of vantage points. UNH has established a leadership position in the medical services arena. That said, those looking to capitalize on long-term gains brought on by reform should begin their search here. Moreover, this equity's total return potential out to 2016-2018 is worthwhile. Too, the possibility for more significant dividend hikes over that span appears good, as cash flow and profits are expected to rise.
About The Company:UnitedHealth Group is a diversified health and wellbeing company. It offers products and services to more than 70 million individuals 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.