UnitedHealth Guides Strong Earnings as ACA Impact Wanes - Analyst Blog

On Dec 2, UnitedHealth Group Inc. (UNH) gave a detailed guidance on the components forming the earnings for 2014 and 2015 suggesting growth as the headwinds related to the Affordable Care Act (ACA) mellows. Shares gained 0.8% in the trading session.  

 

For 2014, the insurer expects revenues of $130.0 billion which is 6.1% higher than the actual revenue of $122.5 billion reported in 2013. Top-line growth is expected to come primarily from the Optum segment, with a likely 24% revenue growth compared with 5% revenue growth in UnitedHealthcare segment.  

 

Bottom line for the UnitedHealthcare segment is expected to decline by 14%, compared to an increase of 30% at Optum, which will lead to overall earning increase of just 2-3% year over year, to 5.60–$5.65 per share from reported  earnings of $5.50 per share in 2013. The Zacks Consensus Estimate for 2014 earnings is $5.64 per share. 

 

Operating cost ratio is expected to increase to 16.7% in 2014 from 15.8% in 2013 led by an increase in ACA fees and change in business mix. 

 

As far as enrollment is concerned, the company expects 2014 membership decrease by 1.6 million in Commercial benefits, and by 275K in its International business. However, Medicare, Medicaid and Part D business are expected to add 1.5 million members. Operating cash flow of approximately $8 billion is expected. 

 

For 2015, the company expects to generate revenues in the range of $140.5 billion to $141.5 billion and earnings per share of $6.00–$6.25. The Zacks Consensus Estimate for 2015 is $6.14 per share. The adverse impact of ACA will subdue to some extent and will not hamper earnings growth. However, ACA-related cost will increase operating cost ratio. The company expects operating cash flow in the range of $8.0–$8.4 billion.

 

Company guidance indicates that Health Benefits business is facing headwinds related to Obamacare, though the degree of constraint continues to soften. Optum, however, is the jewel in the company's crown, offering sustainable growth and upside in double digits. UnitedHealth has, however, a tradition of guiding conservatively and then beating its own estimates to surprise investors. 

 

As the impact of ACA wanes, or in other words, the companies adjusts better to the regulatory change, health insurers are projecting higher earnings for the years ahead. Aetna Inc. (AET) for example expects higher earnings for 2015 but has not provided any specific figures. Another player Humana Inc. (HUM) expects its 2015 earnings to be in the range of $8.50–$9.00 per share, up from expected earnings of  $7.40–$7.60 per share range in 2014.

 

UnitedHealth carries a Zacks Rank #2 (Buy). Another stock worth considering include Centene Corp. (CNC). It carries a Zacks Rank # 1 (Strong Buy).

UnitedHealth carries a Zacks Rank #3 (Hold). Another stock worth considering include Centene Corp. (CNC). It carries a Zacks Rank # 1 (Strong Buy).