The largest U.S. health insurer UnitedHealth Group (UNH - Free Report) reported solid third-quarter 2015 results. The company continued its long streak of earnings beat and topped on the top line once again.
Earnings per share came in at $1.65, above the Zacks Consensus Estimate by 2 cents and 1.2% higher than the year-ago earnings. Revenues rose 26.5% year over year to $41.5 billion, edging past the Zacks Consensus Estimate of $39.9 billion. Growth was broad based with a double-digit increase in the revenues for Optum, the health services segment (see: all the Healthcare ETFs here).
UnitedHealth reaffirmed its earnings guidance of $6.25–$6.35 for the current fiscal year. However, the midpoint of the guided range is below the Zacks Consensus Estimate of $6.33 that led to some negative sentiments. Further, many investors were disappointed by the medical cost incurred by the company in the quarter. Medical cost ratio increased 90 bps year over year to 80.6% in the third quarter.
As a result, the stock dropped as much as 5.3% following the earnings announcement but recovered slightly to close at down 1.6% on elevated volume. The stock currently has a Zacks Rank #2 (Buy) with a Value Style Score of ‘B’ and belongs to a solid Industry having the Zacks Rank in the top 14%. This underscores its potential to outperform in the weeks ahead.
Investors should note that UnitedHealth has been clearly outpacing the broad sector and the market, gaining about 19% in the year-to-date time frame as against the gain of 0.8% for the S&P 500 Health Care Index and the loss of 1.7% for the S&P 500 index. Further, the stock has risen over 36% over the past one year. This suggests that the company has easily dodged the recent turmoil resulting from the broad-sell off in the biotech and healthcare sector and has the potential to do so in the coming months as well (read: Biotech Boom Over? 3 Health Care ETFs to Invest in Instead).
ETFs in Focus
Given this, investors may want to take a closer look at the ETFs having the largest allocation to this health insurer giant though UNH has shown rough trading following its earnings. For those, the iShares U.S. Healthcare Providers ETF ((IHF - Free Report) ) could especially be on their radar as UNH takes the top spot in the fund’s portfolio at 13.3% share.
This ETF provides exposure to 52 companies that provide health insurance, diagnostics and specialized treatment by tracking the Dow Jones U.S. Select Healthcare Providers Index. About half of the portfolio is dominated by managed care firms while healthcare services and healthcare facilities round off the top three. The fund has amassed $868.2 million in its asset base while volume is good at about 140,000 shares per day on average. It charges 43 bps in annual fees and expenses and added 0.5% following the UNH earnings release. The product is up about 7% so far in the year and has a Zacks ETF Rank of 1 or ‘Strong Buy’ rating with a Medium risk outlook (Ill at Ease with Biotech? Prescribing #1 Healthcare ETFs).
Other healthcare ETFs like Health Care Select Sector SPDR Fund (XLV - Free Report) , Vanguard Health Care ETF (VHT - Free Report) , iShares U.S. Healthcare ETF (IYH - Free Report) and Fidelity MSCI Health Care Index ETF (FHLC - Free Report) also have a decent exposure to UnitedHealth in the range of 3.5–4.5%.
Apart from the healthcare space, UNH is among the top 10 holdings in some large cap ETFs such as SPDR Dow Jones Industrial Average ETF (DIA - Free Report) and iShares MSCI USA Momentum Factor ETF (MTUM - Free Report) . However, these products will be less impacted by the movement of UNH share price.
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