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Will UnitedHealth (UNH) Stock Gain on Q1 Earnings Beat?

UnitedHealth Group Inc. UNH reported first-quarter 2016 earnings of $1.81 per share, beating the Zacks Consensus Estimate of $1.72. Earnings improved 17% year over year.

The earnings beat came on the back of higher revenues. Strong results from the health services business Optum, membership increase and a lower share count due to share buyback also contributed to the outperformance.

UnitedHealth has been surpassing expectations over the last several quarters. We expect the continued outperformance to drive the stock higher.

Including intangible amortization, the company reported net income of $1.67, up 14.4% year over year.

Behind the Headline

UnitedHealth posted revenues of $44.5 billion, almost in line with the Zacks Consensus Estimate. The top line grew 25% year over year. The increase was an outcome of business expansion in both health care benefits and health care services.

The company reported medical care ratio of 81.7%, up 30 basis points year over year.

Total operating cost came in at $41.6 billion, 25.7% higher year over year. The increase stemmed primarily from higher medical and operating costs as well as an increase in the cost of goods sold.

Segment Performance

In the reported quarter, UnitedHealth’s health benefits segment – UnitedHealthcare – witnessed revenue growth of 10.1% year over year to $35.9 billion. Earnings from operations of $1.9 billion were flat year over year.

Revenues from Optum improved 54% year over year to $19.7 billion in the quarter under review. Earnings from operations surged 49% year over year to $365 million mainly driven by a 72% increase in revenues from the sub-segment OptumRx. Continued focus on accelerating growth, and improving margins and productivity through enhanced integration and business alignment led to the overall improvement of this segment.

Membership Enrollment

The company’s Medical membership increased to 47.7 million in the first quarter from 45.8 million in the prior-year quarter.

Capital Position

Cash and short-term investments at quarter end was $13 billion, up 0.8% from the 2015-end level.

Debt to total capital ratio was 49% at the end of the first quarter, unchanged from the previous quarter. UnitedHealth estimates the ratio to improve in the latter half of 2016 with the lowering of the debt level. Return on equity was 19%, up 100 basis points year over year.

Cash flows from operating activities were $2.3 billion, up 2.2% year over year.

The company spent $0.5 billion on buying back 4.2 million shares in the first quarter.

Guidance

The insurer raised its 2016 earnings guidance to the range of $7.75 to $7.90 per share from $7.60 to $7.80 per share projected earlier. Revenues are estimated at about $182 billion and cash flows from operations are projected at $10 billion.

Our Take     

UnitedHealth’s results reflect consistent gains from its robust Optum segment. Going forward, higher membership, a strong balance sheet and a niche market position are some of the other positives that UnitedHealth should benefit from. Also, the company announced plans to exit its exchange business.
 
Zacks Rank and Other Stocks

Currently, UnitedHealth carries a Zacks Rank #3 (Hold). Some better-ranked health maintenance organizations are Molina Healthcare Inc. MOH, Anthem, Inc. ANTM and WellCare Health Plans, Inc. WCG. While Molina sports a Zacks Rank #1 (Strong Buy), Anthem and WellCare Health carry a Zacks Rank #2 (Buy).

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MOLINA HLTHCR (MOH): Free Stock Analysis Report
 
UNITEDHEALTH GP (UNH): Free Stock Analysis Report
 
WELLCARE HEALTH (WCG): Free Stock Analysis Report
 
ANTHEM INC (ANTM): Free Stock Analysis Report
 
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