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On Monday, U.S. health insurer UnitedHealth Group Inc. (UNH - Analyst Report) announced 2013 earnings estimates in the range of $5.25–$5.50 per share. The Zacks Consensus Estimate of $5.60 is 10 cents above the high end of company’s guidance. Revenue for 2013 is expected to fall in the range of $123–$124 billion.

The company provided a narrow outlook mainly due to an uncertain business environment and difficult employment scenario. The company is also worried about a tight commercial pricing environment and a reduction in funding in the Government’s business (Medicare as well as Medicaid), which will directly impact its earnings. Moreover, higher operating cost is expected to be seen since the company will have to spend for complying with new rules and laws as stipulated by the Health Care Reform.

We are not surprised with the fact that the company has given conservative earnings guidance, since it follows a tradition of guiding conservatively and then beating the estimates to post a positive surprise. For 2012, the company had initially provided a narrow earnings outlook of $4.55–$4.75 at its investor day last November.

However, each of the already three reported quarters this year had surpassed the Zacks Consensus Estimates. The company had made an upward revision to 2012 earnings for the fourth time last month. It now expects 2012 earnings to fall in the range of $5.20–$5.25. This track-record showed by the company in the past helped it prevent a big decline in share price, which was down by 1%, yesterday.

Nothwithstanding the challenges looming in the year ahead, we strongly believe that UnitedHealth is better positioned than other carriers such as CIGNA Corp. (CI - Analyst Report), Humana Inc. (HUM - Analyst Report) and Aetna Inc. (AET - Analyst Report), given its size, scale and a significant business diversification. The company has been very proactive and is aggressively reshaping its business since the Health Care Reform came into the scene, with a view to become more resilient to the changing health insurance market place.

The company is seeking to grow in the less regulated parts of its business. In this regard, it has considerably improved its health services segment branded as Optumn, which provides ancillary health services. 

Currently, the segment accounts for approximately 1/5th of the company’s revenue. It is expected to represent 30%–40% of the revenue in a few years, due to the new market opportunities presented by the industry’s focus on health and wellness, preventative treatments, and reduced spending. The company has also made a number of acquisitions under this segment to bolster expansion.

UnitedHealth is also enhancing its international business, which will fuel long-term earnings growth. The recent acquisition of Brazil-based Amil is sure to bolster UnitedHealth’s top-line growth in the emerging Latin American market.

The recent TRICARE contact and national account wins will also increase the company’s enrollment, driving top-line growth.

Moreover, UnitedHealth’s track-record of solid capital execution and a strong capital position will help bottom-line earnings to rise.
 
UnitedHealth currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term ‘Neutral’ recommendation on the shares.

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