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UnitedHealth (UNH) Beats on Q2 Earnings: Will Stock Gain?

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UnitedHealth Group Inc. (UNH - Free Report)  reported second-quarter 2016 earnings of $1.96 per share, beating the Zacks Consensus Estimate of $1.89. Earnings improved 13% year over year.

 

UnitedHealth Group Inc. (UNH - Free Report) Street Actual & Estimate EPS - Last 5 Quarters | FindTheCompany

The earnings beat came on the back of higher revenues. Strong results from the health services business Optum, and membership increase contributed to the outperformance.    

UnitedHealth has been surpassing expectations over the last several quarters. While the stock gained 2.3% in the pre-market trading session, we expect continued outperformance to drive the stock higher.

UNITEDHEALTH GP Price, Consensus and EPS Surprise

UNITEDHEALTH GP Price, Consensus and EPS Surprise | UNITEDHEALTH GP Quote

Including intangible amortization, the company reported net income of $1.81, up 10.4% year over year.

Behind the Headline

UnitedHealth posted revenues of $46.5 billion, outperforming the Zacks Consensus Estimate of $45.3 billion.  The top line grew 28% year over year. The increase was an outcome of business expansion in both health care benefits and health care services.

The company reported medical care ratio of 82%, up 30 basis points year over year.

Total operating cost came in at $43.3 billion, 30% higher year over year. The increase stemmed primarily from higher medical and operating costs as well as an increase in the cost of goods sold.

Segment Performance

In the reported quarter, UnitedHealth’s health benefits segment – UnitedHealthcare – witnessed revenue growth of 14% year over year to $37.6 billion. Earnings from operations of $1.9 billion declined 5% year over year.

Revenues from Optum improved 52% year over year to $20.6 billion in the quarter under review. Earnings from operations surged 51% year over year to $1.3 billion mainly driven by a 69% increase in revenues from the sub-segment OptumRx. Continued focus on accelerating growth as well as improving margins and productivity through enhanced integration and business alignment led to the overall improvement of this segment.

Membership Enrollment

The company’s Medical membership increased to 47.98 million in the second quarter from 45.86 million in the prior-year quarter.

Capital Position

Cash and short-term investments at quarter end was $10.97 billion, down 15% from the 2015-end level.

Debt-to-total-capital ratio was 47.8% at the end of the second quarter, down 90 basis points from the 2015-end level. UnitedHealth expects the ratio to improve in the second half of 2016 with the lowering of the debt level. Return on equity was 19.6%, unchanged year over year.

Cash flows from operating activities were $1.7 billion, up 45% year over year.

During the quarter, the company hiked the annual dividend by 25% to $2.50 per share.

Guidance

UnitedHealth tightened its 2016 adjusted earnings guidance to the range of $7.80 to $7.90 per share and GAAP earnings to $7.25 to $7.40 per share.

Our Take     

UnitedHealth’s results reflect consistent gains from its robust Optum segment. Going forward, higher membership, a strong balance sheet and a niche market position are some of the other positives that UnitedHealth should benefit from. Also, the company announced plans to exit its unprofitable exchange business.
 
Zacks Rank and Other Stocks

Currently, UnitedHealth carries a Zacks Rank #4 (Sell). Some better-ranked health maintenance organizations are Select Medical Holdings Corporation (SEM - Free Report) , Aetna, Inc. AET and WellCare Health Plans, Inc. (WCG - Free Report) . While Select Medical and WellCare Health sport a Zacks Rank #1 (Strong Buy), Aetna carries a Zacks Rank #2 (Buy).

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