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Bull of the Day: UnitedHealth Group (UNH)

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Earnings season is an exciting time for investors, as a plethora of new information presents a fresh opportunity to buy strong stocks. One example of a stock that still has room to run higher in the wake of its earnings announcement is UnitedHealth Group (UNH - Free Report) .

UnitedHealth is a managed health care company. Through its Optum segment, UNH provides health analytics, billing solutions, pharmacy benefits management, care delivery services, and other technology-forward offerings. The company’s UnitedHealthcare unit provides benefit plans. UNH is one of the largest companies in the United States and the world’s largest healthcare company in terms of revenue.

UnitedHealth reported earnings on January 15. The company posted quarterly earnings of $3.28 per share, beating the Zacks Consensus Estimate and improving 27% year over year. Revenue for the period was $58.4 billion, ahead of estimates and about 12% higher than the year-ago quarter thanks to healthy growth across both segments.

Revenue at UnitedHealthcare improved 11% year over year. Optum revenue surged 13%. Total operating costs across the whole company were up 12%, but UNH offset this through a 10 basis point improvement to operating margin. Management reaffirmed its 2019 EPS guidance and said that it expects full-year revenue in the range of $243 to $245 billion.

UNH’s positive quarter and strong outlook naturally led to upward earnings estimate revisions for the company:

The Zacks Rank is founded on a belief that share prices and earnings estimate revisions are inherently related. Since UNH has witnessed positive estimate revisions, it has earned a Zacks Rank #1 (Strong Buy) rating. This is a one to three month indicator of direction and should help extend UNH’s post-earnings momentum. The stock is currently up about 8% since its report was posted.

There are several other things to like about UNH in addition to this earnings optimism. For one, the company’s growth rates deserve more praise. UNH has witnessed a CAGR of 12% from 2006 to 2018, underscoring its strong market position and core business. UNH sports an “A” grade in the Growth category of our Style Scores system.

Optum has been one of the primary drivers of growth in recent years. This has been led by growth in pharmacy care services, care delivery, technology, government services, and international operations. From 2014 to 2018, Optum’s contribution to operating earnings has increased from 25% to 47%.

There’s also a decent value case to be made for the stock right now. Shares are trading at about 18x earnings, which is a slight premium to the industry’s average of 16x, but certainly within reason for a market leader. UNH also sports respectable PEG and P/S ratios of 1.4 and 1.1, respectively. The stock has earned a “B” grade for Value in our Style Scores system.

This leads to a closer examination of UNH’s strong balance sheet. The company has generated mostly increased cash flows from 2009 through 2018, only declining in 2013. For 2019, UNH expects cash flow in the range of $17.3 to $17.8 billion, which would represent year-over-year growth of 12% at the midpoint. This cash flow strength allows the company to repurchase shares and increase the dividend.

UNH simply has the ideal combination of industry leadership and recent earnings momentum. This is a stock that should continue to climb in this type of market.

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