Before the stock market’s recent fit of volatility, managed-care giant UnitedHealth Group was on a pretty good run.
The nation’s biggest health insurer saw its stock price touch a new high of 126.21 Aug. 18 before falling with the broader market. Shares now trade about 10% off that high.
ButUnitedHealth ( UNH ) has delivered three straight quarters of double-digit EPS growth — the first time in years that’s happened — as well as two straight quarters of double-digit revenue growth. The company boasts an IBD Composite Rating of 90.
UnitedHealth and peers such asAetna ( AET ),Anthem ( ANTM ),Cigna ( CI ) andHumana ( HUM ) have benefited from a number of macro trends.
One is the impact the Affordable Care Act, often called ObamaCare, has had on health insurance enrollment. Another is industry consolidation, which brings more size and financial might to companies at the top of the food chain.
UnitedHealth also has gotten a lift from internal initiatives to bolster its business, analysts say.
“The company has been performing pretty well over the last year,” Morningstar analyst Vishnu Lekraj told IBD. “They’ve been focused on opening a very good (ObamaCare) exchange strategy, and they’ve been growing their Medicare business.”
UnitedHealth offers a diverse lineup of products and services under the managed-care umbrella.
Delivering Care And Cash Flow
Its core business is the UnitedHealthcare segment, which offers health-benefit plans and services to organizations of all sizes and to individuals. UnitedHealthcare also offers health coverage and well-being services to people 50 and older, as well as other plans and programs that range from Medicaid to children’s health.
The company’s Optum Health segment has three businesses: OptumHealth, OptumInsight and OptumRx.
OptumHealth serves the health and financial needs of more than 75 million individuals through programs offered by employers, third-party payers, governments and direct care. Its programs aim to reduce costs for customers, improve workforce productivity and optimize participants’ well-being.
The OptumInsight business provides software and information products, consulting and business process outsourcing to clients such as hospitals, physicians, commercial health plans and government entities.
OptumRx offers pharmacy benefit management (PBM), pharmacy network management, benefit plan design and claims processing.
In a recent research report, analysts at Trefis cited the Optum segment as a key growth driver for UnitedHealth in terms of financial performance and its stock price.
“Optum has consistently diversified its … services and products through timely innovations like the launch of a free Android app, OptumizeMe, which helps customers achieve their fitness goals,” Trefis said. “Continued innovations and a focus on customer service should help Optum attract more customers and boost revenues.”
Morningstar’s Lekraj has a similar take, saying UnitedHealth has “been making large investments in the Optum business.”
The largest of those investments came in July, when the company closed its $12.8 billion buyout of Catamaran, a PBM.
The deal is expected to help UnitedHealth better compete against large PBMs such asExpress Scripts (ESRX) andCVS Health (CVS).
Catamaran was folded into UnitedHealth’s OptumRx unit. According to a report from Zacks Equity Research, the transaction is not expected to add to UnitedHealth’s 2015 EPS “as its impact on earnings will be fully offset by interest, amortization and integration costs. The acquisition should be 30 cents accretive to the company’s 2016 EPS.”
Without And With Catamaran
Thomson Reuters’ analysts see UnitedHealth growing full-year EPS 11% in 2015 and 16% in 2016.
Even without Catamaran, the OptumRx unit is doing pretty well. During the second quarter it delivered an 11% year-to-year revenue gain to $8.9 billion. Script volumes during the quarter increased 4% to nearly 150 million adjusted scripts.
Overall company revenue during the quarter gained 11% to $36.3 billion. That topped the consensus of analysts. UnitedHealth also beat earnings views and raised its full-year EPS guidance.
However, the company’s stock price declined following the Q2 report as its consolidated medical care ratio, also known as the medical cost ratio, came in higher than expected. This ratio measures a company’s health care costs to its premium revenue.
UnitedHealth executives were unavailable to comment for this article, but on a Q2 conference call, Chief Financial Officer Dan Schumacher said the higher costs were due in part to expenses tied to adding more people to its enrollment.
“Obviously, there is an impact associated with the 1.3 million lives we have added over the last 12 months in Medicare, Medicaid, as well as in exchanges which have higher relative care ratios,” he said.
Schumacher also noted that even though the cost ratio fell below Wall Street expectations, UnitedHealth lowered its cost ratio by 20 basis points year to year.
Encouraging The Consolidation
UnitedHealth and other managed-care stocks got a lift from this summer’s Supreme Court decision to uphold health care subsidies allowed by ObamaCare.
Trefis noted that the decision “benefits insurers such as UnitedHealth,” in part because ObamaCare customers “may not be able to afford private health insurance without the subsidies.”
The nation’s shifting health insurance laws are cited as one reason the managed-care industry is in a period of consolidation.
On July 3, Aetna announced plans to buy Humana in a $37 billion cash and stock deal. At the time, that was the largest transaction in managed care.
Three weeks later, Anthem one-upped Aetna by announcing plans to acquire Cigna for $54.2 billion. When that deal closes, it will create the world’s biggest managed-care firm.
Although UnitedHealth’s name was bandied about as a potential candidate for a megadeal, that seems unlikely now, Lekraj said: “I think the industry is settled in terms of consolidation. UnitedHealth might buy a regional operation, but probably nothing on a large scale.”
Date: September 1, 2015