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UnitedHealth Stays Neutral

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We are reiterating our Neutral recommendation on the shares of UnitedHealth Group Inc. (UNH - Free Report) , following second quarter earnings results, which included a 10.2% positive earnings surprise. Over the past four quarters, this Zacks Rank #3 (Hold) company delivered positive surprise with an average beat of 11.1%

Why Reiterate?

On Jul 18, 2013, UnitedHealth Group reported its second-quarter 2013 earnings of $1.40 per share, higher than the Zacks Consensus Estimate of 1.26 per share. Earnings were also up 7.4% on a year-over-year basis.

Results reflected a solid performance from its health benefits business along with strong growth from Optum segment.

Counting on the positives, UnitedHealth is one of the biggest and most diversified health insurers in the U.S. It holds a huge market share in the Medicare market, which is expected to boom in the coming years as millions of Americans enter retirement. The company has made a number of acquisitions (most significant of which is the purchase of XL Health Corp.) to further strengthen its position in the Medicare Advantage  market, resulting in long-term growth.

UnitedHealth  is also expanding its accountable care contracts and intends to reach $50 billion mark over the coming five years.

UnitedHealth’s health service business is an essential part of the company’s diversification strategy. Management is considering the expansion of the health service business to produce 30%–40% of operating income over the longer term.

UnitedHealth is also expanding its business internationally. Geographical diversification features prominently in the company’s plan of action to overcome restrictions imposed by the Health Care Reform back in the U.S.

On the tepid side, UnitedHealth is also witnessing increased operating costs due to high medical and operating cost pressures related to the Affordable Care Act.

Though the company had experienced low medical care over the past couple of years, management expects it to return to normalized medical utilization trends soon. This will wipe out the extra earnings benefit the company had been enjoying so far.

Other stocks

Other health insurers,  such as Aetna Inc. (AET - Free Report) , CIGNA Corp. (CI - Free Report) , WellCare Health Plans Inc. (WCG - Free Report) , all with a Zacks Rank #2 (Buy), are worth considering.

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