UNH Reports Strongly, Ups Estimate

UnitedHealth Group Inc. ( UNH - Analyst Report ) has kicked off earnings season for the health insurance sector today by reporting second quarter net earnings of $1.27 per share, up 9% year over year.

The outperformance can be attributed to strong revenue growth at UnitedHealthcare, higher revenues from the Optum businesses, and strong enrollment growth, partially offset by higher operating costs.

The largest publicly traded health insurer (based on total revenue) posted revenues of $27.3 billion, an increase of 8.0% year over year. Revenues were ahead of the Zacks Consensus Estimate of $27.2 billion by a modest 0.4%. The year-over-year increase was led by higher premiums and higher product revenue in the health benefits business (UnitedHealth Care), coupled with strong revenue growth at the service segment.

UnitedHealth’s medical costs increased 7.7% year over year to $20.0 billion. Total operating costs increased 8.2% year over year to $25.0 billion, owing to growth initiatives undertaken at the pharmacy benefits business.
Segment performance

During the quarter, UnitedHealth’s health benefits segment named UnitedHealthcare witnessed revenue growth of 8.0% year over year to $25.5 billion. Earnings from operations also increased 8% to $1.9 billion.
The company’s other segment, the health services segment branded as Optum, witnessed a growth of 4.0% year over year to $7.3 billion. The company is aggressively expanding this segment as a means to diversify its earnings. It expects Optum to contribute more than 30% of the earnings mix.

Membership Enrollment

UnitedHealth, the second-largest insurer after WellPoint Inc. ( WLP - Analyst Report ) based on enrollment, showed strong enrollment trends, as membership increased across all major business lines, led by recent acquisitions. Total commercial enrollment was up 2.8% year over year and remained stable compared to the previous quarter.

Medicaid grew 5.8% sequentially and 10.7% year over year, whereas Medicare Advantage grew 3.4% sequentially and 18.1% year over year.
Capital Position

UnitedHealth continues to maintain a healthy balance sheet, ending the quarter with a debt-to-capital ratio of 30%, slightly lower than 31% in the last quarter. Days sales outstanding were 9 days, unchanged relative to the prior-year quarter. Days claims payable (DCP) were 48 days, up 1 day year over year.

Share Repurchases and Dividend

During the quarter, UnitedHealth hiked its quarterly dividend by 30% to $21.25 cents per share. The company’s board has also approved the repurchase of 110 million shares, which is about 10% of UnitedHealth’s outstanding shares.

2012 Guidance Affirmed

Backed by better-than-expected earnings, management raised its fiscal 2012 earnings estimates to a range of $4.90 – $5.00 per share from the earlier guidance range of $4.80 – $4.95. It also revised its revenue estimates at $110 billion from the earlier guidance range of $109 billion – $110 billion. This is the second time so far in this year that the company has increased its earnings estimates.

Our Take

During the quarter, the company won the TRICARE West contract to serve military service members. The contract will provide UnitedHealth access to the military health care market, one of the areas that the company has been trying to penetrate for a while now.

Coming back to the quarter results, UnitedHealth has been performing well with continuous revenue as well as membership growth. We remain bullish about its prospects going forward, given the proactive measures adopted by the company to align itself with the changing market scenario and the Health Care Reform.

The company is diversifying across businesses, products as well as geographies and has taken several strategic initiatives in this regard. A low reliance on debt, a solid capital position along with healthy cash flow generation will allow the company to undertake strategic growth initiatives.

UnitedHealth generally sets the tone for the performance of other health insurers. Following the strong results of the health insurer major, we expect favorable performance from its peers Aetna Inc. ( AET - Analyst Report ) , CIGNA Corp. ( CI - Analyst Report ) , WellPoint Inc., and Humana Inc. ( HUM - Analyst Report ) , all of which are slated to release their second quarter earnings soon.

UnitedHealth currently retains a Zacks #2 Rank, which translates into a short-term Buy rating. We, however, maintain our long-term Neutral recommendation on its shares.